Peter Eavis of DealBook is reporting that big banks will likely see better results (profits) due in large part to mortgage activity.
“Federal stimulus has ignited a boom in mortgage refinancing, benefiting both homeowners and banks. And the good times could continue as the government steps up its support of the broad housing market,” Eavis writes.
“The proof will be in the profits.”
The article, however, does contain some serious problems. And here they are:
For one, Eavis never mentions how many so many homeowners will actually benefit from the refinancing availability.
Banks make profits on mortgages sure, but they are not locked in a citadel of good news, limited only to the financial firm.
Another issue:
“Instead of holding on to new mortgages that earn interest over a number of years, banks sell nearly all of them to investors after packaging them into bonds. The federal government, through entities like Fannie Mae, attaches a guarantee of repayment on the loans, making the bonds even more attractive to the investors.”
For one, Fannie Mae does not offer an implicit guarantee similar to the Federal Housing Administration and, by relation, Ginnie Mae.
Second, for every mortgage refinanced, the original bond suffers. It’s called prepayment risk, something woefully missing from the article.
Still the article is stimulating, and I guess that’s the point.
