Banks Skimming Mortgage Profits

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The government may be making loud noises about how it wants to bring down home mortgage rates to help consumers. But the biggest beneficiaries of the government largess have been the banks -- not borrowers, according to a report in the Wall Street Journal.

Backed by cushy government programs, banks have boosted their profits margins on mortgage loans. But don't expect them to pass on the savings, even as mortgage rates inch higher.Since 2008, the Treasury Department has spent $112 billion to shore up Fannie Mae and Freddie Mac. The Federal Reserve has bought up more than a trillion dollars in mortgage-backed securities since the start of 2009. And all that help is boosting profit margins.

Recently, there the industry margin used to measure the profitability of banks' main mortgage business-- selling home loans to Fannie and Freddie -- has jumped by 25 percent.

Here's how it works. Suppose a bank writes a mortgage for 5.1 percent, and sells it to Fannie with a coupon rate of 4.35 percent. The difference of 0.75 percent is booked as profit for the bank, which uses that revenue to cover the costs of doing business. Between 2000 and 2008 that profit margin averaged 0.73 percent of a percentage point, according to data from Barclay's Capital. In 2009, the average was a much wider at 0.98 percent of a percentage point.

So the banks are making .25 percentage of a point more on each loan they make. Banks say they need this higher profit to offset higher expenses. I guess the billions in bail out money, on top of their ability to borrow funds at practically zero cost, hasn't been enough for the poor banks. So rather than pass along the savings to beleaguered consumers, they are lining their pockets.

What these profit numbers tell us, loud and clear, is that the banks are skimming their profits off the backs of home buyers by charging higher interest rates.

You might think there isn't much of difference between 5 percent and 4.75 percent. But it will boost your monthly payment by $30 a month in higher principal and interest payments. That adds up to an additional $11,000 in interest over the life of a 30-year loan of $200,000.

If that still doesn't seem like a big deal, consider that banks wrote $1.4 trillion of mortgages in the first three quarters of 2009, according to Inside Mortgage Finance. Wells Fargo and Bank of America sold 45 percent of the mortgages on the market and both reported blowout mortgage earnings in 2009. (Both banks report fourth quarter earnings tomorrow, January 20). So that $11,000 times millions of loans adds up to big profits for the banks.

So who is the government really helping with its loan programs - the banks or the home buyers?
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