"Mortgage Fees Highest Since 2000 Will Buoy U.S. Banks (Update1)
By Kathleen M. Howley
March 24 (Bloomberg) -- David Rapaport, a professor at the University of California San Diego Medical School, is paying an upfront fee of $3,500 to refinance his mortgage at 5.13 percent. A year ago, his rate was 6.25 percent and there were no fees.
“I’m happy just to be able to get a refi and reduce my monthly payment,” said Rapaport, 57, who owns a two-bedroom townhouse in San Diego, where home prices have dropped 32 percent since June 2006. He is saving $264 a month with the new loan from San Ramon, California-based CMG Mortgage, meaning it will take about a year to recoup the fees he paid.
Home refinancing is forecast to hit a two-year high and banks are reaping the profits as mortgage origination fees are the costliest in eight years, according to data compiled by the Federal Housing Finance Agency. Banks are raising loan costs for customers ahead of an April 1 increase in the “adverse market” fee that Fannie Mae and Freddie Mac charge lenders.
“We came through an incredibly competitive environment in the last few years when banks were practically giving away loans, and now they’re able to widen their profit margins,” said Anthony Polini, an analyst at Raymond James & Associates Inc. in New York. “Mortgage lending is having a positive contribution to earnings growth.”
The average cost of getting a U.S. mortgage was $640 per $100,000 in December and January, the highest since October 2000, according to Federal Housing Finance Agency data. In 2005, the end of a five-year housing boom, the cost was $280 per $100,000, the lowest on record.
Rates Close to Zero
Banks are benefiting as the Federal Reserve benchmark rate stands close to zero, the lowest in its history. The difference between the fixed rates that banks charge for mortgages and the Fed rate that shows their cost of borrowing is averaging 4.83 percentage points in the current quarter. That’s the second- widest spread since 2004, after the fourth quarter’s high of 4.89 percentage points, according to data compiled by Bloomberg.
The average spread between fixed mortgage rates and 10-year Treasuries is 2.3 percentage points. That’s close to the 22-year high set in the fourth quarter.
The Mortgage Bankers Association today boosted its forecast for 2009 home-loan originations by $800 billion to $2.78 trillion as a wave of refinancing and low interest rates spur homeowners to seek out new loans.
Refinancing will total $1.96 trillion in 2009 and purchase originations will increase to $821 billion, the group said in a statement. Total originations may rise to the fourth-highest on record.
“Banks are able to borrow short and lend long,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. “They get their financing at rock bottom rates and charge higher fees, meaning their margins are extremely high.”
Wall Street may have found a way out of its misery as earnings from creditworthy borrowers help rebuild the banks’ balance sheets. Eight months after buying unprofitable Countrywide Financial Corp. to become the largest U.S. mortgage lender, Bank of America Corp. Chief Executive Officer Kenneth Lewis told an audience in Boston on March 12 he won’t need any additional bailout funds from the Treasury.
A “boom” in refinancing is spurring his mortgage unit to hire staff to handle the volume, Lewis said.
Citigroup Inc. CEO Vikram Pandit said on March 10 his bank is having the best quarter since 2007 after more than a year of losses. Jamie Dimon, JPMorgan Chase & Co.’s chief, said March 11 that the nation’s biggest bank by stock market value had a profitable January and February. He wasn’t more specific.
Bank of America in Charlotte, North Carolina, and New York- based Citigroup and JPMorgan received $120 billion of federal loans since last year.
JPMorgan, Bank of America, Wells Fargo & Co. in San Francisco and New York-based Goldman Sachs Group Inc. and Morgan Stanley probably will report a combined net income gain of 65 percent this year, according to analysts surveyed by Bloomberg. Citigroup’s loss may narrow to $3.2 billion from $27.7 billion, analysts estimate. JPMorgan, Bank of America and Wells Fargo’s 2008 results included costs and gains associated with acquisitions.
Banks started boosting fees three months ago, before Fannie Mae and Freddie Mac increased the “adverse market delivery charges” they pass on to banks when purchasing loans.
Loans to people with credit scores of 680 to 699, the minimum required to be considered a “prime” borrower, will have a fee of 1.5 points. Borrowers with credit scores of 660 to 679 will pay 2.5 points, according to Fannie Mae. Financial institutions use credit scores to assess risk.
Borrowers hunting for new mortgages face “sticker shock,” said Robert Davis, branch manager at Black River Mortgage Co. in Chester, New Jersey. “Zero-cost” home loans are harder to get because banks aren’t paying brokers enough to absorb closing costs, he said. Borrowers typically add at least 0.25 percent to their rate when they don’t pay upfront fees.
Joanne Lee, a nutritional consultant in Boston, said she would rather pay $3,500 to refinance her $350,000 mortgage, currently at 6.18 percent with Citizens Financial Group in Providence, Rhode Island, than roll the closing costs into the rate. She has a credit score of 760 and about $90,000 of equity in her 2,330-square-foot Boston townhouse.
“These are probably the lowest rates my generation is going to see,” said Lee, 60, who has completed the paperwork for the refinancing and is waiting for her mortgage broker to lock a rate of 4.8 percent or lower. “I’m calling it my last refi, because I’m going to try to get it at rock bottom and then stay put.”
In San Diego, Rapaport declined to give specifics on the size of his loan. His annual percentage rate, or APR, a measurement that factors fees into the rate so consumers can compare loans, is 5.19 percent.
Extra cash from lower monthly payments is helping to boost consumer spending, which accounts for more than two-thirds of the economy, said Barton Biggs, managing partner at New York- based hedge fund Traxis Partners LLC.
“Mortgage refinancings are one reason we’re expecting a 1 percent to 1.5 percent gain in consumer spending this quarter,” Biggs said in an interview. “Everyone is wondering where the money is coming from. Certainly part of it is from lower mortgage payments.”
U.S. banks had combined losses of $26.2 billion in the fourth quarter because of writedowns and loan-loss provisions related to mortgage-backed securities and subprime defaults at the biggest companies, data compiled by the Federal Deposit Insurance Corp. show. It was the industry’s first loss since 1990.
The Federal Reserve began purchasing $500 billion of bonds backed by conforming loans in January to drive down fixed rates. That pushed the average U.S. rate for a 30-year fixed mortgage to an all-time low of 4.96 percent during the week ended Jan. 15, according to Freddie Mac. The Fed announced March 18 it would triple the purchases to $1.25 trillion.
The average fourth-quarter rate for the $11 trillion of outstanding mortgages was 6.21 percent, according to the Bureau of Economic Analysis in Washington. About one in five of the loans have “negative equity” and can’t be refinanced because the balance is bigger than the value of the home, according to First American CoreLogic, a Santa Ana, California-based seller of mortgage and economic data.
“The only things preventing an unbelievable flood of refinancings are the higher fees and the lack of equity,” said Austin Bunn, Rapaport’s mortgage broker in San Diego."