Could mortgage rates go lower? Could they be lower if not for bankers eager to put some extra cash on the bottom line?
Those questions have been around in national news stories lately, but bankers here say conditions aren’t quite right to make that trend a reality in Massachusetts.
Quoting industry analysts, the New York Times reported earlier this month that banks are taking advantage of a widening spread between mortgage rates and bond rates. The difference between mortgage rates and bond rates allows banks to sell mortgages to investors for a profit. Analysts told the Times the spread has been historically high and mortgage rates, even recently, should have ticked down along with bond rates.
But they haven’t, and banks nationwide say they need to pocket the difference in order to cover present compliance costs and those they expect to pay in the coming months and years.
Conditions here in Massachusetts seem to both encourage and prevent this kind of thing.
First, the housing market in Massachusetts, especially in Greater Boston, seems to be gaining steam.
So far this year, the top 20 banks in Massachsuetts have written $15.4 billion in home loans. That’s compared to $12.9 billion year-to-date in 2011 and $13.4 billion in 2010, according to data provided by The Warren Group, publisher of Banker & Tradesman.
Tangible Results
The increase in business shows in the bottom line of some banks. Rockland Trust, for example, reported second quarter revenue from mortgage origination of $1.5 million. In the same period a year ago, it reported $683,000.
In the first half, Berkshire Bank pulled down $32.4 million from the sale of securities compared to $3.5 million in the first half of 2011.
The Newburyport-based Institution for Savings has likewise been successful. Loan volume is up 15 percent year-over-year, President Michael Jones told Banker & Tradesman. It did $90 million in net loans in the first half, and expects to do $400 million in originations this year. Its historic high "was probably $300 million," Jones said.
But like many banks in Massachusetts, the Institute for Savings is small and mutual. It doesn’t sell the mortgages it writes, so it realizes no gains on the interest rate spread being played by the big boys.
Jones said he "wouldn’t doubt it at all" if banks were holding mortgage rates above where they could be in order to boost profits.
"Banks that are selling, they do need to cover some costs," Jones said. "A 10-year bond is 1.40, and they need to cover costs. I’m not sure you’d get the answer you want to get even if you asked the folks that are selling loans, but the cost of banking has risen."
Reaching Bottom
Jon Skarin, executive vice president of the Massachusetts Bankers Association (MBA), told Banker & Tradesman the type of activity that allows banks to profit from the spread isn’t widespread in Massachusetts.
"I don’t think it’s been a big deal for most of our members," Skarin said. "For one thing, they have tons of deposits right now, and Fed funds are so cheap, so there’s less opportunity for that type of thing to happen. In other areas of the country, you don’t have the amount of deposits you have here."
He said many of MBA’s members aren’t making a lot of profit from home loans.
"Rates are so low, people aren’t making much money, and they’re not paying out anything on deposits," Skarin said. "It would be one thing if (mortgage rates) were 5 percent or 6 percent, and they weren’t paying on deposits, but it’s a compressed market."
Skarin said Massachusetts banks selling mortgages are doing so to keep interest rate risk reasonable. "You can’t keep so much 30-year, fixed-rate paper on your books quarter after quarter," he said.
Also, there haven’t been any signs in the market that mortgage rates have much lower to travel.
"We don’t see anyone undercutting. What are they going to do? Go down to 2 (percent)? I don’t think you’re seeing any manipulation."
