The Downside of Lower Mortgage Rates for Banks
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What preliminary market headlines set the stage for the mortgage servicing discussion?
Here's your Money Briefing. I'm J.R. Whelan at The Wall Street Journal in New York. You'd think that mortgage rates hanging around the lowest level seen in years would be good for your investment in the big banks, since more people are buying homes and originating new mortgages. Well, you'd be wrong. We'll check in with a journal reporter in a moment who will explain why. First, some money in market news that you should know. The Securities and Exchange Commission is considering whether to institute new financial safeguards to reduce the risk of wrongdoing by advisors, namely by smaller size advisors who don't have enough capital or insurance to compensate customers for losses they caused. Turns out smaller advisors are about 1.5 times as likely to
to declare bankruptcy in the year following a customer dispute that results in a legal settlement. And Harvard Business School estimates that they're three times as likely to have an unpaid judgment or lien show up on their record. Smaller investment advisors are also often not heavily capitalized and in many cases don't carry enough insurance to cover a potential significant legal judgment.
Why is the SEC considering new safeguards for smaller investment advisors?
And if there is money available, it isn't much. The North American Securities Administration Association says that smaller advisors often don't need insurance unless they personally hold funds or securities for clients. And even then, the requirement is at most a $50,000 bond. And the IRS has ruled that people with tax-advantaged flexible spending accounts or health savings accounts for their out-of-pocket costs can use that money to purchase 23andMe genetic testing kits. The company sells genetic tests that provide consumers with information about ancestry, wellness, and other items through a saliva sample. The health reports provide information on whether individuals have gene variants that increase their risk for developing certain diseases.
The IRS says that that health portion of 23andMe's test is medical care for tax purposes, but it didn't issue a ruling on ancestry testing from the same saliva sample. The bottom line is that consumers can claim up to $117.74 of
How did the IRS ruling on 23andMe affect consumer medical spending accounts?
of the $199 cost of a health and ancestry kit as medical care for tax purposes.
Much of Wall Street is focused on the end of July when the Federal Reserve may lower interest rates, but let's talk about something a little different, mortgage rates. When mortgage rates are low, and they've been low for some time, it generally helps banks' mortgage businesses, but not currently. And Wall Street Journal reporter Ben Eisen is here with some details. So Ben, the lower rates are impacting the big banks' mortgage servicing rights. Can you explain what those are?
Sure. So when you take out a mortgage, there is someone on the other end who's collecting the payments and handling taxes.
What are mortgage servicing rights and why do banks hold them?
And there's a foreclosure handling something like that. And that's considered a mortgage servicer. And they take a little bit of the cut of your mortgage payment in return for those services. And it's an asset that banks hold a lot of. Many banks hold hundreds of billions of dollars worth of mortgage servicing rights.
Yeah, this is a $3.6 trillion business.
Well, banks hold servicing rates on $3.6 trillion worth of mortgages. It can generate a decent amount of fee income.
In the second quarter, we saw average mortgage rates fall below 4%. And that hit banks like Wells Fargo and JPMorgan Chase pretty hard.
Yeah, it specifically hit the value of their mortgage servicing rights. So banks have to mark the value of these things every quarter.
How do falling mortgage rates reduce the value of banks’ mortgage servicing rights?
And at the end of the quarter, with rates a lot lower, the value of these rights was down. It's important to note that this is distinct from the business of making mortgages. So their mortgage operations themselves of kind of originating mortgages, those were all up. But at the same time, the value of the mortgage servicing rights went down. And at some of these banks, it was enough to offset the uptick in origination.
Right. And so the originations will typically go up because the mortgage rates come down.
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Chapters
6 chapters
1
What preliminary market headlines set the stage for the mortgage servicing discussion?
0:05–1:09
2
Why is the SEC considering new safeguards for smaller investment advisors?
1:09–2:13
3
How did the IRS ruling on 23andMe affect consumer medical spending accounts?
2:13–3:00
4
What are mortgage servicing rights and why do banks hold them?
3:00–3:45
5
How do falling mortgage rates reduce the value of banks’ mortgage servicing rights?
3:45–4:50
6
Why can rapid rate moves and imperfect hedging magnify losses for banks?
4:50–5:45
Speakers
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