A bank loans $200,000 and makes 1/12 of 8% of that amount, or $1333 every month. For every loan made, the bank's income goes up by $1333. hypothetically and simplistically speaking. One would think that would be enough. Its a money making machine with almost no risk for the bank since it owns the house as collateral. I imagine that a defaulted home loan has some expense for the bank because regulations prevent an immediate eviction and there is cost to find another borrower.
if i start a bank with a million dollars, lets do it on the internet and pretend there are no startup costs, i can make five house loans and make $6665/month. the start up money is not available for other investments any more.
At some point, the banks didn't like their startup money tied up in mortgages. Who could buy these mortgages? Bigger banks. What if you are already at the top of the bank ladder? In 1938, the US government created an organization called Fannie MAE to buy home mortgages from US banks. The government says this frees up the bank's money to make more loans and allow for more Americans to own homes. What I wonder is, how is selling the mortgage a good idea for the bank? Yes they get their money back but loose their revenue stream. Sallie MAE is buying at a profit i imagine but how big of a profit? Sounds like our tax dollars are being spent to enrich banks in the name of a societal good.
Over the last week, Fannie MAE lost half its stock value. July 7th 2008: MAE 19.46. July 11th 2008 MAE 10.25. Freddie MAC is a similar story. Is this an overreaction? Could these be rock-bottom prices and a unique time to buy in?