All-time low mortgage rates, coupled with belief that the economy is finally recovering, have caused an increase in the demand for home loans and refinancings. In fact, there been so much of a surge that banks are having a problem processing the paperwork in a timely manner, causing a log jam.
But instead of hiring more staffers, mortgage bankers are using the situation to add to their profit margins.
In the end, home buyers and refinancers are waiting way longer than they should be!
How is something like this possible?
Ever since the collapse of the housing market in 2008, many banks have been leery of the mortgage business. Less financial institutions are giving out home loans. Because it's a more concentrated industry now, the banks that still lend to prospective homeowners are in control. It's a matter of supply and demand.
How much so?
In 2000, the top two mortgage lenders (the predecessors to Wells Fargo and JPMorgan Chase) made up only 14% of the total mortgage loans that year. Those same two companies are still the main lenders in 2012, but now make up 44% of all home loans.
Today, more and more Americans are gaining confidence in the recovery of the economy, and are wanting to take advantage of the all-time low interest rates -- meaning, more people are applying for loans.
You would think that because more people are wanting to borrow, the lenders would hire more staff to make sure all of the paperwork is filed as quickly as possible, right?
Well, that's somewhat accurate!
Tim Sloan, the Chief Financial Officer for the U.S. top mortgage lender Wells Fargo, recently said in an interview that his company has added about 2,000 people in the third quarter of this year alone, and JPMorgan Chase executives report similar hiring statistics.
But both companies, as well as other lending institutions, are nervous about hiring too many new employees because they don't know believe the housing uptick is going to last much longer.
JPMorgan Chase CEO Jamie Dimon told investors last that week that the increase in mortgage applications will continue through next quarter, and “maybe for a couple of quarters after that but it won't last for that much longer.”
Those projections may be accurate, as The Mortgage Bankers Association estimates that banks will make $1.47 trillion of home loans this year for home purchases and refinancings.
But then they expect that number to decrease by nearly a third in 2013.
What does this mean for you?
With less competition (i.e.: fewer banks being involved in the mortgage industry) and an increase in consumer demand for mortgages, the lenders have little reason to cut interest rates.
After all, because mortgages are in high demand, they're making more off of the higher interest rates -- meaning, the Federal Reserve's plan to help consumers may, in fact, benefit the banks instead!
In September, the Fed announced their latest stimulus program, and started buying $40 billion each month in mortgage-backed securities. The plan was intended to keep interest rates low, and encourage more Americans to borrow from the banks, therefore stimulating the economy.
But economists say the interest rates are now dropping at a slower pace -- and dropping less than they would have if the Fed would have simply allowed the normal market to work itself out.
Since September 13th, the average loan rate for a 30-year, fixed-rate, conventional mortgage has only dropped 0.18%. Experts say that number would have nearly doubled (by dropping 0.31%) under normal circumstances.
But since rates are still less than 4%, it's not deterring Americans from buying a home or refinancing now.
So, for the time being, you can expect banks to not hire more staffers, and put the extra revenue in their own pockets, instead of savings into their clients' wallets!
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