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Huge Spread Between Borrowing and Lending Costs: Are The Banks Getting Fat?

By
Mortgage and Lending with SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) NMLS 223495

 There's an interesting article today on Bloomberg.com, by Ann Woolner.  That's Ann on the left.  She's not real big on banks right now, because they're hoarding the cheap money the Federal Reserve has made available. 

She makes the point that if she went under financially, none of her creditors (the yard guy, housekeeper, hairdresser, credit card companies, etc.) would suffer significant damage to their businesses.  So why do investment banks get the special treatment?  They're big.  So big, apparently, that their failure threatens to topple the US economy.

 Bear, Stearns, in the Fed's opinion, was too big to fail.  (Ironic, because a co-author of the book by that same title, Too Big To Fail: The Hazards of Bank Bailouts, is none other than Gary Stern, president and CEO of the Federal Reserve Bank of Minneapolis.  Apparently, Stern has changed his mind.  The book came out in 2004. 

Here's an excerpt from Ann Woolner's article that Real Estate agents need to understand and communicate to buyers who aren't in the business:

And now, fully qualified, would-be homebuyers looking for low-interest mortgages get turned away by lenders unwilling to pass along rate cuts the Fed gave them specifically to make lending easier and revitalize the economy.

And so, the gap between the rate the banks pay and what they charge for money widens. They are gorging themselves on a historically wide spread -- 2.7 percentage points, according to Bloomberg data -- between the 10-year government bond yield and the interest rates they charge for 30-year fixed mortgages.

Are the banks getting fat?  I jumped all over SunTrust back on March 10th in my post Mortgage Pricing Is Out of Whack! for not passing on the savings to the consumer.  Banks don't make money by borrowing from the Fed unless they can lend it out at a higher interest rate. 

If real estate buyers put their hands in their pockets because they perceive the cost is unreasonable, the banks won't get fat.  They'll continue their downward spiral.

I'm Mike in Tucson, your preferred Tucson, Arizona mortgage lender.
Mike Jones (Tucson Mortgage Company, LLC): Loan Officer in Tucson, Pima County, Arizona
Think of me as your local expert.

Comments(13)

Charlotte Home Loans Your Charlotte Mortgage Lender
Charlotte, NC

Mike,

Good post with great information.

I am torn on the whole Bear Stearns thing. I do believe that if the consumer confidence had been higher, we'd have seen a company die. But with the economy being talked down by all the talking heads, consumers are scared to death and to see this big company fall would have really created major issues.

As far as the banks getting fat, the one thing that we have in this country that is unique is choice. As a lender, or as a broker, we can choose who we place our loans with. If one lender's rates are too high, we can look to another. I do know of a few lenders that raised their rates on purpose... not to pad their profits,  but to effectively slow down the submission rates that were overwhelming them! If someone was foolish enough to still send it to them, then they would gain financially from it.

The downside to these banks raising their rates is that the general consumer, which has been sold a bill of goods in regards to the "evil mortgage broker", end up paying way more than they need to because they THINK a broker would cost them more. IMHO, those borrowers deserve to pay more because they did not compare the reality of how a broker or correspondent lender could save them money.

Thanks for bringing this to light!

Ed Nailor - Charlotte Mortgage Lender

Mar 28, 2008 07:40 AM
Larry Brewer - Benchmark Realty llc
Benchmark Realty LLc - Nashville, TN
Mike - I think they have let fear take over the business. Someone will break out of this and show some leadership. When it happens, the followers will follow.
Mar 28, 2008 07:55 AM
Mike Jones
SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) - Tucson, AZ
Mike Jones NMLS 223495

Larry,

There's no question about it; you are SO right.  Thanks for commenting 

Ed,

Thanks for a thoughtful comment; Active Rain has some great people, and you're one of them.

Mike in Tucson

Mar 28, 2008 07:57 AM
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time
Mike, Interesting post. Everything the Fed has been doing is to salvage the lenders not the consumer. Is it right? I just don't know. Our economy is in such a mess right I truly don't know what needs to be done. We need time.
Mar 28, 2008 08:13 AM
Mike Jones
SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) - Tucson, AZ
Mike Jones NMLS 223495

Bryant,

Lou Barnes, Colorado mortgage broker and nationally syndicated columnist, has a great article on Inman today:  Bailout Not a Four Letter Word.  Here's a paragraph regarding Bear Stearns:

Examples: Bear Stearns was "bailed out" or "rescued." Like hell it was -- it was liquidated. More than half of its 12,000 employees will lose their jobs; stockholders lost 94 percent of value; and senior officers and directors are gone. The Fed will babysit $29 billion in the worst toxic waste, and wreckage-acquiring Morgan-Chase will retain all other liabilities including litigation. The only people bailed out, rescued: taxpayers saved from the effects of a massive fire sale.

So Bear, Stearns wasn't salvaged.  They were liquidated.  It was a good thing from my point of view, and a step in the right direction for the economy as a whole.

Mike in Tucson

Mar 28, 2008 08:37 AM
William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX

Mike,

A good post, very thought provoking.

I question the Bear Sterns sale. The stock was worth $160.00 two years ago before the crisis was known. It went down to $30 the Friday before the sale because of the bad loans. Then why was it only worth $2.00 to $10.00 after the Fed guaranteed the bad loans?

With the bad loans no longer a threat, should the stock have been worth much closer to, and possibly more than the $160 it was at before the loans went bad?

We have become a nation of Lemmings lead by sheep.

The question is not are the banks making money, that's their job.

The question is not, is mortgage pricing out of whack, it is.

The question is not why are gas prices so high.

The question is why are we putting up with it?

Why do we listen to and reelect crack-pots?

Why have we abandoned logic for hate?

Why have we allowed 70% to go from the minimum passing score to the percentage of failing student?

Why do we listen to teachers who tell us the problem is we don't pay them enough? Would they teach more if they were paid more?

Bill

Mar 28, 2008 09:02 AM
Richard Sweum
1st Security Bank - Everett, WA

CYA!  That is all they are doing, making sure they have enough reserves to cover their impending losses for 2008.  Remember Carl Sagan (Nova)....Billions and Billions, and Billions in losses.  The government doesn't have a bandaid big enough, visualize a 2 slashed carotid arteries and one Q-tip to stop the bleeding.

Watch the fat cats begin to exercise their stock options and registering sales with the SEC over the next 3 months.

Mar 28, 2008 09:11 AM
Mike Jones
SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) - Tucson, AZ
Mike Jones NMLS 223495

Bill,

Your comment is worthy of a post in itself, and a featured one at that.  I especially appreciate the line about having abandoned logic for hate.  I despise the habit all the "news" anchors have of bringing in guests and then devolving into a shouting match, with everyone trying to talk over the other.  Who's the target market for that?

Mike in Tucson

Mar 28, 2008 09:18 AM
asdf asdf
Dana Point, CA

I would hardly say the lenders are getting fat of the cheap credit they've got. Some of them are still on the brink of collapse and the rest are just praying that they don't fall apart. And to be honest I don't care if they make some of the money back they just lost the last few years.

You better believe that if I was CEO of one of these lenders i'd be raising rates as much as I could. Why wouldn't you? 75% of lenders have gone out of business, there is less competition and brokers are swamping the lenders that are still around. CITI has some god awful turn time like 45 days, lol... this is really a supply and demand issue. The demand for money is still great but the supply is totally shot to crap. I said it along time ago and i'll say it again, rates are going to go up. I couldn't for the life of me figure out why lenders kept rates low as they were getting slaughtered. It's simple business, you charge more for your product than it costs, if your losing money you aren't charging enough.

Anyways, i'm sure no one really wants to hear that rates should go up and spreads should go up, but if we want a healthy market that's what needs to happen.

Rogan McGillis

www.reversemortgagecity.com

Mar 28, 2008 10:50 AM
Eleanor Thorne
Equity Resources - Cary, NC
Advantage Lending 919-649-5058

Mike I like her comments... and like so many other conservative viewpoints I read, I can understand the sentiments of people who say that bailing folks out who go into foreclosure (for WHATEVER REASON) is the wrong move.  People (and ergo the banks) should be responsible for their actions.  On the other hand, the RTC is re-hiring those who helped close so many banks in the late 80s (apparently there are not that many people with the expertise to do this). The Fed believes that 150 to 200 banks in California, Florida (and I personally know a small Community Bank in So. Virginia not doing so well) will be closing.  As this happens, it will make a difference in the economy on many levels ... but the REAL "next wave in the economic crunch" will be, IMHO when people get their 401K statements for the first quarter in a few weeks... then consumers will truly realize how bad it is... and that THEY are the real losers here - on every level.  They don't have equity in their homes, their retirement investments are worth virtually nothing.  Another year, another birthday and they are closer to the "retirement age" with very little to actually retire on... and we have NO ENERGY PLAN to get gas to a tolerable level!

Okay so the FED made this "cheap Money" available.  Their real strategy was to get LIBOR lower so that as these loans reset it would not create as much payment shock.  They've done that at the risk of ignoring inflation and long term mortgage rates... The NEXT STEP, (again just one chick's opinion) will be to create a real system with enough safeguards that people begin BUYING MORTGAGES.  Until SOMEBODY starts buying mortgages - mortgage rates will not come down. 

Banks have the same problem prospective homebuyers have right now.  Why would I invest in something that I didn't have any confidence would appreciate or at least MAINTAIN it's value???  It's a tricky market!

Mar 30, 2008 05:18 AM
Billnulls Blog Florida Realty Professional
Charles Rutenberg Realty - Clearwater, FL
AHWD
Mike - great post - I am watching to see how this all works out!
Mar 31, 2008 06:16 AM
Mike Jones
SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) - Tucson, AZ
Mike Jones NMLS 223495

Barbara Jo,

The commentary on this post is more "in-depth" than for anything I've written.  I'm sitting there with you, enjoying the comments.

Eleanor,

 I appreciate your comment very much.

Rogan,

Washington Mutual executives just raided the store for $365,000,000 in bonuses.  You might want to give a little more thoughtful consideration to your outlook on business.

Mike in Tucson

Apr 02, 2008 01:42 AM
Charlotte Home Loans Your Charlotte Mortgage Lender
Charlotte, NC

Mike,

Thank you for the compliment. And I love how you have right aligned your responses... I may follow suit just to pay homage!

Ed Nailor - Charlotte Home Loans

Apr 05, 2008 07:47 AM