Banks are making more off mortgages than ever before, refusing to pass on lowered interest rates from federal policy, including the purchase of trillions in mortgage-backed securities by the Federal Reserve, to consumers. This isn’t really the enigma that the New York Times’ Dealbook makes it out to be. It’s simple collusion. Nobody offers 2.8% mortgage rates, so nobody gets them. As a result, the spread that banks capture on their mortgages widens.

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So the natural rate for mortgages should be 2.8%, but banks aren’t passing the lower bond rates to their customers. Their middleman cut has grown.

The claim that banks are simply overwhelmed by mortgage demand is a crock. Mortgage lending fell to a 16-year low in 2011, and the mortgage purchase index shows a general sideways trajectory. Refinances have gone up somewhat with the tweaking of HARP and lowering of rates, but this is off a tremendously low bottom – lending fell 64% from 2006-2011. Anyway, banks were able to handle refi booms when rates dropped precipitously post-2008. And, smaller community banks seem to have no backlog whatsoever.

There may be a clogged pipeline, but you would have to see that as deliberate. Think about it, the less personnel that big banks hire to handle mortgage applications, the more they can constrict supply, the more they can charge for scarce mortgages. It’s a form of rationing, where banks make out of both sides – they don’t have to pay for labor AND they get to charge more for the product! And since they control so much of the market, there’s no real incentive for them to change their practices.

http://news.firedoglake.com/2012/09/19/big-banks-increasing-spread-on-mortgage-profits-not-funneling-cheaper-rates-to-customers/