Friday, April 17, 2009

Bank Profits. The Good, The Bad and The Ugly

I just closed on a refinance today. Great rate (4.375), saves a lot of money short term and long term. Good for me. Good for the lawyer and... good for the mortgage company? Really?

So now the mortgage company is getting $380 less per month in interest payments. So how can this be good? So I had to pick the brains of the loan officer and the lawyer to understand what is going on here.


This is good for the mortgage company because they really don't "hold" the loan. Yes I make payments to them but they actually sell off the loan to a loan holding company, usually overseas, usually china, and the mortgage company basically collects fees for the mortgage closing and for mortgage payments. So, the mortgage company basically makes money on the closing itself.

The mortgage company is thrilled with the new rates being offered since it has caused on explosion in refi's. They are making good money on these refi's and actually is creating jobs. The lawyer said he had to hire two additional assistants due to the load of work.

The loan holding company may make less but they reduce risk by having a good loan get even more solid. So they have reduced risk at a cost of less revenue.

It puts money in my pocket each month which I will either spend and help the economy, or I will save in the bank which helps the bank.


By allowing me to refinance, I am actually potentially taking away a refinance from someone who needs it more. But since it is not my job to help all the poor saps out there who got in over their heads, I don't care.

The loan holding company does loose a little in revenue as mentioned before so their bottom line is slightly hurt. But they are in China so what do we care.

The mortgage company did not require an appraisal. Even though it is the same mortgage company, you would think to avoid risk to the loan holding company, they would require it. The lawyer actually was surprised by this and not real happy that the mortgage company was doing this as he rolled his eyes when he found out.


The ugly side of this is the future. Talking to both the lawyer and the mortgage officer, they were talking about the spike in the refi's in January when rates hit 5% and how that was great for business. But it tapered off in March. Then in late March with the fed driving down rates again, it has caused another spike in refi's. But what is interesting is, the spike is not as big as it was in January. Even though business is good, it seems to be falling off already even with rates around 4.75%. Both expect this to fizzle out in 60 days and it goes right back to pre-January levels of mortgage apps.

Also, very few non-foreclosed homes are being sold. Well over 80% of new mortgage apps they have processed over the last 60 days are foreclosures. The lawyer was disappointed in himself since he just bought a home in July thinking it was the bottom. He now sees the same homes in his neighborhood selling for significantly less via foreclosures. And he sees pricing continuing to get lower.

Both talked about this spike will end and cause stress on their businesses this year. They talked about the current rush and how quickly it faded in March. Unless rates go down under 4.5%, they think the credit market heads right back to where it was. They love the current business and they are taking advantage of it as much as possible. But it is not normal business for them. Refi's and foreclosures are not going to carry the mortgage business. They also said they do not see the light at the end of the tunnel for foreclosure property numbers to be reduced this year.

I was happy to get this done now. They don't see interest rates ever getting that low anytime soon. They see a clear bubble being created due to the euphoria of refi's and foreclosures. They both feel this period is creating a false sense that housing is improving but since 75% of loan apps are refi's, it is inflating the numbers.

I am not smart enough in real estate and mortgages to really know what this means long or short term. The key is, the numbers being thrown around may be misleading around housing, real estate and mortgage apps. So be careful.


  1. Beamer Dog,

    Please consider posting a brief update to your post on 4-13-09, "When Should Shorts Dive In?"

    Monday, 4-20-09 seems set up to be the possible start to the big pullback so many of us have been waiting for. So, there's probably a lot of us who would appreciate hearing (this weekend)any additional thoughts you might have about how to handle Monday and next week.

    Thanks! (And have a good weekend.)

  2. The most important thing you wrote was that China owns our mortgages.... and as a true blue American that frightens the hell out of me.... I see far reaching possibilities due to this...

    Cramer is saying no pullback.... none, ever.... get in the water is fine...

  3. SRS, I think everyone should have a short position right now. I think I stated that in yesterdays post. The odds are definitely in the shorts favor that a pull back is imminent. TA clearly shows we should have a bull back of anywhere from 10% to 30% to 50% of the recent run up. It may not happen today or tomorrow but it is near.

    That said, TA also says if their is a breakout to the upside, we would run over 900. But the odds are in favor of some sort of pullback.

  4. Lara, the off-short unloading of loans has been a common trend for quite awhile. Easy money in services.

    There is very little fear in the market right now and I think Cramer and others are getting greedy. When they get greedy, you get fearful.