Econintersect: After the announcement of QE3 involving the purchase of mortgage backed securities (MBS), the margin on mortgage loans, which represent the profit 
margin for banks, surged to 1.2% to 1.5% (120 basis points to 150 basis points). This is four times the historical margin of 30-50 bp. The Financial Times is reporting that a meeting held Monday (03 December 2012) at a conference at the Federal Reserve Bank of New York saw a strong disagreement between NY Fed officials and banking representatives. The meeting came at a time following recent criticism of the banks for not issuing mortgages to creditworthy borrowers.
One of the participants was reported by the Financial Times to have said:
“If banks are making money hand over fist then why aren’t there more new entrants to the market? There’s just so much uncertainty.”
It was reported that bank representatives suggested that the easing of “reps and warranties” on mortgages would boost the confidence of mortgages lenders. Does this mean that the banks will have more confidence about lending if they are permitted to return to fraud?
The following are from the paper that was discussed at the December 3 meeting:
The two graphs imply an enormous increase in profitability of mortgage lending and a remarkable recovery in the value of mortgage backed securities. (AMBS refers to agency backed mortgages.)
Sources:
- The Spread between Primary and Secondary Mortgage Rates: Recent Trends and Prospects (New York Fed, Workshop Announcement, 03 December 2012)
- The Rising Gap Between Primary and Secondary Mortgage Rates (Andreas Fuster, Laurie Goodman, et al, New York Fed Report, 28 November 2012)
- Lenders and Fed clash in bank loans (Tracy Alloway, Financial Times, 04 December 2012)
