Federal Reserve Seeing Banks Benefiting More Than Homeowners

While we've been seeing a huge drop in interest rates in recent months, The Federal Reserve is livid at the fact that American banks are cashing on the swarm of home sales and mortgage loan refinances, reported The Economist.

Banks have been profiting from homeowners and the mortgage-backed securities, MBS, which have dipped lower than the mortgage rates since 2011.

Specifically, mortgage buyers like Fannie Mae and Freddie Mac have reportedly profited from banks on increased fees for services including guaranteeing no loan default. In addition, banks have earned about $3.50 for every $100 loan sold versus $1.50 back in 2007, according to a Federal Reserve-backed study, reported Economist. These actions lead to hit the consumer's wallet.  

The new agenda for banks now is to widen the spread, which is the difference in borrowing and lending rates, to cover the cost on faulty buy-back loans.

According to The Economist, some banks like Bank of America stopped buying back loans from Fannie and Freddie as early as 2010, lowering the number of mortgages from 13.4m to 9.5m between 2010 and 2012.  This helps them not only meet the margins, but manage better. JPMorgan, for example announced they would be reducing their mortgage unit's employees by 13,000 to 15,000. Some question whether all these regulations are helping banks or people.

"There's a learning process, part of which is you don't expand capacity if you don't understand all the rules," said Paul Miller, managing director at FBR Campital Markets & Co., in an interview with The Economist.

The spreads are probably not going to return to where they were during the market downfall, but experts say with more rules, not only is mortgage lending safer in the country, it's also less competitive as a result, reported The Economist.

The new "qualified mortgage rule" implemented earlier this year, called for banks to thoroughly check borrowers so they are capable of repaying and not defaulting.  While this is more responsible, it comes at a cost to potential homebuyers who are looking for a bit nicer homes.