US commercial banks have responded to the Fed's MBS purchase program by warehousing more mortgages on their balance sheets. As discussed earlier (see this post), the spread between mortgage rates and where these loans could be financed via the GSEs has blown to historical highs. That gave banks a sufficient cushion to warehouse loans without the risk of rates rising (particularly given the Fed's projected buying). Non-revolving (fixed maturity as opposed to home equity) mortgages on banks' balance sheets have spiked to record levels of $1.61 trillion.
|Agency RMBS and closed-end mortgages on bank balance sheets|
(Source: FRB; unit =$1mm)
At the same time the growth in holdings of agency RMBS (mortgage backed securities issued by Fannie Mae and Freddie Mac) has stalled, as the yields on those securities collapsed to record lows.
This increasing comfort with holding residential mortgages for some period instead of selling them to the GSEs will improve banks' profitability by increasing interest income (given that their cost of funds is close to zero.) Over time this should also bring down mortgage rates as competition kicks in (which, as discussed before, is not going to materially improve economic growth or the labor markets).
WSJ: - For the week ended Thursday, the 30-year fixed-rate mortgage averaged 3.49%, compared with 3.55% the previous week and 4.09% a year earlier. Rates on 15-year fixed-rate mortgages averaged 2.77%, versus 2.85% a week earlier and 3.29% a year ago.