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Mortgages Are Now A Bank’s Best Friend

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http://www.nytimes.com/2009/07/15/business...mp;ref=business

For the last two years, housing has been at the center of the banking industry’s troubles. But for at least one quarter, it will help lift its results.

Even as banks remain cautious about lending and millions of borrowers still risk losing their homes, the mortgage business is returning as one of the most lucrative corners of the financial industry.

The clearest evidence is emerging this week, as the nation’s biggest banks report their second-quarter numbers.

As independent mortgage companies and brokers shut their doors last fall, and major players like Bank of America, JPMorgan Chase and Wells Fargo swallowed up troubled rivals, lending profit margins widened, doubling at big banks amid a refinancing wave during the first half of the year, analysts said.

Mortgage securities prices have rallied, allowing banks to book hefty gains on their investment portfolios. And accounting tactics — like new rules that let banks book lower losses on troubled assets and reductions in reserves for future losses because of mortgage modifications — may further burnish their results.

“It’s the mother of all mortgage quarters,†said Meredith Whitney, a prominent banking analyst. But whether or not those profits are sustainable remains an open question. “You might believe that the environment has stabilized, but looks are sometimes misleading,†she added.

Over all, analysts say that second-quarter bank earnings are likely to be good, if not quite as strong as the first quarter’s. Bank stocks have rallied over the last four months in anticipation of brighter news.

The KBW Bank Index, a popular measure of the financial sector, has nearly doubled from its low in early March.

Goldman Sachs reported strong profits from trading on Tuesday. But the resurgence of the mortgage business should help most of the big commercial banks, from small regional lenders to national players like Bank of America, Citigroup, JPMorgan Chase and Well Fargo, which report this week.

Banks still face a number of threats. Credit card and commercial real estate loan losses continue to climb. And for many, the quarter will be rife with unusual accounting charges.

Even so, the refinancing rebound is providing a lift. As the Federal Reserve cut interest rates to record lows, hundreds of thousands of borrowers were able to take out cheaper loans. Lenders issued an estimated $1 trillion worth of mortgages during the first half of 2009, according to Inside Mortgage Finance.

Meanwhile, mortgage lending margins are at least two to three times higher than a year ago, analysts said, making it an increasingly important force at the biggest banks. Since 2000, mortgage banking has represented about 3 percent of revenue for Bank of America, JPMorgan and Wells Fargo, Ms. Whitney says. In the first quarter, it more than doubled to about a 6.4 percent share.

Banks also stand to book large gains on mortgage bonds as well more obscure instruments called mortgage servicing rights, which rose late in the quarter in anticipation of more borrowers holding onto their existing loans. That extends the number of payments that lenders can collect.

Banks are essentially getting free money from the Fed and banks margins have gone up. Shock horror, I mean who would have predicted that.

All the slashing of interest rates is to do one thing boost bank margins.

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http://www.nytimes.com/2009/07/15/business...mp;ref=business

Banks are essentially getting free money from the Fed and banks margins have gone up. Shock horror, I mean who would have predicted that.

All the slashing of interest rates is to do one thing boost bank margins.

rebuild banks capital at the expense of the taxpayer is the name of the game by the beloved leaders of the free world

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