How low can they go? When it comes to interest rates, the answer seems to be "not a whole lot." Rates dropped to historic lows in early February and haven't budged much since, prompting homeowners to trade in their old mortgages for shiny, new, cheaper ones. Borrowers are saving money, and banks are making money. It's a match made in heaven, it seems.
There's a slight glitch for homeowners, though. It seems that so many are looking for refinances that the banks can't handle all the extra work. In late February, Bank of America (NYSE: BAC ) announced that it was putting limits on the number of telephone applications it would accept, and telling those who were not already customers that they might have to wait as long as 90 days until their applications would be processed. Adding to the backlog is the Obama administration's Home Affordable Refinance Program, which helps those with underwater loans or poor credit to obtain refinanced mortgages.
But that's only part of the problem. The housing meltdown caused the mortgage-writing business to shrink, so only a few big banks have most of the trade -- a cool 55% now belongs exclusively to Wells Fargo (NYSE: WFC ) , JPMorgan Chase (NYSE: JPM ) , Citigroup (NYSE: C ) , and Bank of America. Of those lending goliaths, Wells Fargo commands one-third of the market, and it's making buckets of cash doing it.
Big banks have found that they don't have to drum up business or offer especially great rates to garner refi business, because people are literally standing in line to get in on the savings. Seeing an opportunity to increase their profits, banks are padding the interest rates they offer customers, not really caring if they go elsewhere, and have raised fees and closing costs. US Bancorp (NYSE: USB ) , for example, doubled its revenue from writing mortgages in Q1 this year versus last year, and has greatly increased its visibility in the mortgage market over the past several months. At the same time, the banks' gain on sale, made when loans are bundled and sold as securities, has increased by a wide margin – an average of $3,000 per loan, according to The Wall Street Journal.
Meanwhile, B of A, Citi, and Wells Fargo are still telling prospective customers to expect a 90-day wait, despite saying that they are hiring staff left and right to deal with the influx of business. JPMorgan has a timeframe of 45 to 60 days, a veritable blink of an eye in this market.
Banks are making a killing, and customers are saving -- just not as much as banks are reaping, or as much as they could save if banks weren't taking such a big cut. Despite all this activity, the refinance boom is muted compared with previous ones, probably because of a mix of reduced competition, stricter loan guidelines, and higher costs for consumers. The market is inordinately refi-heavy, with these types of loans representing nearly 77% of all mortgage originations. This is not the greatest news for the economy, which needs more mortgage activity of all types if housing is to recover.
The Journal notes that the party may almost be over, since the Mortgage Bankers' Association is forecasting a huge decrease in refinancing activity for next year. But don't worry. Banks have almost a year to figure out how to squeeze the difference out of banking customers like you and me.
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