Mortgages: A Bank’s Eye View

Motley Fool analyst Matt Koppenheffer sits down with Rick Engdahl for a side-of-desk interview about banks. Are they really that hard to understand? Can the big banks be trusted? Join us for a discussion that sheds some light on banks from Citigroup  (NYSE: C  )  to Wells Fargo  (NYSE: WFC  ) , as well as some of the smaller players.

In this brief video segment, Matt explains asset/liability matching, and why banks are happy to refinance mortgages, even when rates are at an all-time low.

A full transcript follows the video.

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Matt Koppenheffer: The refinancing boom has been a big boon to banks.

I think at its peak, the mortgage business, overall, was somewhere in the range of 80% refinancing action. It's because rates have been so low. When rates are that low, obviously, you know, people look at the rates and they're like, "Well, go out there and refinance my mortgage."

When that happens, the mortgage goes to the bank. In a lot of cases -- in most cases, actually -- the bank sells that off to Fannie Mae or Freddie Mac, and they collect a fee in between, and they report that as fee income.

Again, that half of the business that's fee income, part of it is that. It's originating mortgages and selling them off, and that's slowing now.

Rick Engdahl: Is that why banks don't really care so much what the mortgage rate is? They're happy to accommodate you with a refi, even if it's a low rate, because they'll still get money on that transaction fee?

Matt: Well, that's part of it. Part of it is that they're selling it off, but part of it, too, is that banking is a game of asset/liability matching. If you issue a mortgage at X%, then you match it with some liability that is lower than that.

If you're doing a mortgage at 4%, and you can match it with a liability that's at 1%, you make the 3% differential in there, and you can lock in that spread, then that's good business.

It's a little bit of a misnomer, too, when we think about most people -- or a lot of people -- take out 30-year mortgages. They're not 30-year assets for a bank because of refinancing, because of just how much people move around -- people selling their house and moving up to a new house.

A 30-year mortgage tends to be, in terms of the duration that that stays on the banks' balance sheet, is much shorter than that. It's still a relatively long-term asset versus the deposits and the CDs that banks finance them with, but it's nowhere near 30 years.


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