With interest rates at record lows, there has never been a better time for Americans to refinance their home loans, at least in theory. Credit is still tight, making refinancing difficult for many, but refinancing activity is up despite all this. According to a report in the Financial Times, however, the biggest beneficiaries of all this low-interest lending is — you guessed it — the biggest banks in the country. Meanwhile, the biggest losers are smaller banks and thrifts.

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According to the FT, it is due to a unique aspect of the U.S. mortgage market, specifically the rampant securitization of mortgage debts, that has created this dynamic. Big banks dominate when it comes to mortgage origination, but they “rarely keep mortgages on their books,” explains the FT. “Instead most home loans are sold into the secondary market, and repackaged into residential mortgage backed securities.” Thrifts and small banks, on the other hand, tend to “keep most mortgages on their books.”

When a homeowner refinances their mortgage, the issuing bank pays down their existing one in what is basically a massive prepayment, which causes the party holding the loan to lose out on future interest payments. Not only that, points out the FT, but they are also “saddled with cash, which they have to reinvest while yields are at record lows.”

Big banks, meanwhile, are able to pocket a “gain on sale” because new mortgages, despite low rates for consumers, have higher yields than RMBS in the market.

“You could characterize this as a transfer…to the large banks,” Brian Foran of Nomura, a Tokyo-based financial services group and global investment bank, told the FT.

While banks are cashing in on refinancing of the same loans they doled out in years past, private equity is cashing in on the foreclosure crisis by picking up foreclosed homes en masse and turning them into rentals, presumably to be sold off once the housing market rebounds. Bloomberg reported in January that private equity firms are “jumping into distressed housing,” investing billions in single-family REO homes.

In theory, this could help recovery, but if private equity takes too much of the market share, some fear that they will effectively push individual buyers out of the market and be a massive transfer of wealth to private equity players who will be able to generate rental revenue until market conditions allow for a profitable sale of the property.

And so, two of the processes by which we’ll slowly drag our housing market back out of the gutter will also line the pockets of the best and brightest who helped us get into the mess in the first place, and in the case of the big banks, companies that taxpayers bailed out.

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