BLOG VIEW: Mark Twain once wrote, ‘If you don't read the newspaper, you're uninformed. If you read the newspaper, you're misinformed.’ I can only imagine what Twain would have said if he saw the quality of coverage of mortgage banking in today's mainstream media!
On Sept. 18, The New York Times ran an article titled ‘An Enigma in the Mortgage Market That Elevates Rates,’ by Peter Eavis. The premise of the article is that banks are intentionally charging higher rates to consumers than they should be charging. However, Eavis demonstrated a poor understanding of how mortgage rates are determined and, most importantly, how the industry has changed over the past four years.
The article suggested that the 30-year fixed mortgage rate should have been closer to 2.8%, as opposed to the 3.55% average rate that was available at the time of its September publication. The article also noted that the average spread between consumer offer rate and lender sales was approximately 0.75% between 2007 and 2011, yet had grown to 1.4% between 2011 and the present. As a result, the article called this change ‘weird’ and ‘strange.’
Ultimately, the Times speculated that banks are artificially keeping rates high to reduce demand.Â Of course, the Pulitzer-honored newspaper failed to consider that the mortgage industry is roughly 45% smaller in 2012 than it was in 2007 and, consequently, there may indeed be a real capacity problem. Unless the newspaper believes interest rates should be fixed by government fiat, real market forces will result in fluctuations from previous norms. This is neither ‘weird’ nor ‘strange.’
One might excuse this mistake as poor journalism. But, more recently, William C. Dudley, the president of the New York Federal Reserve Bank, also weighed in on the failure of mortgage rates to drop to ‘expected’ levels.Â His conclusion was that it was simply a matter of a lack of competition in the mortgage market.Â
While Dudley's premise is far more plausible, and likely does contribute to a higher spread between consumer offered rates and lender secondary market transactions, it still misses the primary reason for the differential.
What has actually happened is that the fundamental economics of mortgage lending have changed. Loan underwriting requirements and processing timelines have changed. Licensing and education requirements have reduced staffing and limited the ability to ramp up in order to meet sudden demand surges. Business risks have increased dramatically.Â
All these make for a better, safer industry. But, when changes of this nature happen in an industry, it requires margins to change as well. It is, indeed, a sign of caring about building a sustainable business and an industry to serve consumers over the long haul.
The legendary humorist Will Rogers once remarked, ‘All I know is just what I read in the papers, and that's an alibi for my ignorance.’ Unfortunately, too many people today get their information on how the mortgage banking industry operates from misreported stories in major media – but, to contradict Rogers, that is no excuse for ignorance.
David Coster is the author of Total Mortgage Services' Total Mortgage Blog and a guest blogger on MortgageOrb. Phil Hall's Monday column will return next week.