America's Banks Are Boring Again

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Once upon a time, banks lent money to people to buy homes with. These loans were kept on the bank's books, and when people made their monthly mortgage payments, that money came right back to the bank.

Those days are largely over. In the years leading up to the financial crash, banks began selling their mortgages to other financial institutions for them to be "securitized": packaged up and sold off to investors. For a long time, Fannie Mae and Freddie Mac, the now government-run housing giants, were doing the bulk of that mortgage securitization, but now banks are keeping more mortgages on the books.  A return to the good old days? Not quite, but many see it as a positive development nonetheless, for investors and the country in general.

When less is more
According to the Financial Times, which broke the story, regulators, policy makers, and even executives at Fannie and Freddie are happy to see more and more banks keeping the loans they originate on their own books.

This doesn't mean loans all of a sudden aren't going to be securitized and sold off to investors. They certainly are. But any bank that's not just shuffling its loans off to be packaged up by another financial entity has to be sure that those underlying loans are good because, if they're not, and homeowners start defaulting en masse, it will be the likes of JPMorgan Chase (NYSE: JPM  ) , Bank of America (NYSE: BAC  ) , Citigroup (NYSE: C  ) , and Wells Fargo (NYSE: WFC  ) that will be left holding the bag. Securities packed with poorly underwritten, defaulting loans was the underlying cause of the financial crisis.

And the mere fact that banks want to keep more mortgages on the books -- and hence keep more investor money all to themselves -- is a potential sign of a returning robustness to the housing market. Since the Dodd-Frank financial reforms of 2010 (which are still working their way into place), the country's big banks -- no longer able to make rubbish bags full of money the way they used to, such as by making trades with their own money -- are on the hunt for new, more stable sources of revenue. This is one of them.

The slow return of boring banks
According to the National Association of Homebuilders, residential investment and housing services together make up about 17% to 18% of the country's gross domestic product. Hence Federal Reserve Chairman Ben Bernanke's attempt to boost the housing market by scooping up $40 billion per month in mortgage-backed securities (all part of his third round of quantitative easing, or QE3): The more the Fed buys, the more the demand; the more the demand, the more banks should be lending to hopeful homeowners, thus stimulating the housing market.

As noted in the FT article, the other piece potentially driving this trend of private mortgage securitization is Fannie and Freddie's hiking their fees for securitization services. Such fees have doubled since the beginning of 2011. This was done with the express intent of driving the private mortgage-securitization market: to move more and more risk away from taxpayers, who had to pick up the pieces when the MBS market fell apart in the mid-2000s.

Steven Abrahams, an MBS expert at Deutsche Bank (NYSE: DB  ) , put it this way to the FT: "As guarantee fees go higher, it will become more and more economically logical to hold your highest quality loans on the balance sheet. The realistic likelihood of incurring losses on those loans is extremely low, maybe in the neighborhood of 3 to 5 basis points. But the average loan that is getting guaranteed these days costs you 52 bps." 

Any way you look at it, the trend toward increased private securitization of mortgages is good: good for the economy, as it will force banks to be more careful about who they lend to, and good for banks, who will see more revenue coming in from a stable source, i.e., properly underwritten mortgages. Slowly but surely, even as they take on more risk, banks are becoming boring again -- and that's a good thing. In the last four years, the world has had all the banking excitement it can handle.

Thanks for reading and for thinking. Got big banks on the brain? Check out The Motley Fool's brand new report on Bank of America. In it, our analysts give you a thorough detailing of the superbank's prospects along with three reasons to buy and three reasons to sell. Just click here for full access.


Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2163160, ~/Articles/ArticleHandler.aspx, 10/25/2016 8:28:44 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,169.27 -53.76 -0.30%
S&P 500 2,143.16 -8.17 -0.38%
NASD 5,283.40 -26.43 -0.50%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes