Several reports recently have documented why the spreads between mortgage bonds and mortgage rates have widened so much, but few have agreed as to why mortgage rates have not fallen lower, given the Federal Reserve’s latest announcement that it would buy more agency mortgage backed securities.

The mortgage lending landscape has changed dramatically since the financial meltdown of 2008, with some ramping up volume and others exiting the business. Wells Fargo
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] mortgage origination was up a whopping 72 percent in the first half of this year from the same time a year ago, according to Inside Mortgage Finance. Bank of America
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] originations were down 65 percent. Underwriting is tight, and lenders make no apologies, but mortgage banking profits are also way up, and lenders make no apologies for that either.

“There is nothing wrong with people making profits, I think both sides of the system need to be healthy. I don’t want to defend lenders, but I will say that the amount of infrastructure it takes to do these billions and billions of dollars of loans is not insignificant,” said Sanjiv Das, CEO of CitiMortgage
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]. “We’ve had to build new sites, had to hire thousands of people, train them, make sure they are doing the right sets of activity. Remember, we are dealing with huge amounts of regulatory pressure at the same time, making sure that every I is dotted and every T is crossed.”

Das points to huge loan volume increases, especially with refinances, as more borrowers try to take advantage of record low rates. He also says that regulatory uncertainty has lenders strapped in what they’re willing to do now, especially given a still murky atmosphere surrounding mortgage put-backs by Fannie Mae and Freddie Mac on legacy loans (put backs: when Fannie and Freddie make banks buy back bad loans).

He also points to great uncertainty surrounding the potential fiscal cliff. The loss of the mortgage interest deduction, as well as the potential end of the current tax exemption on short sale debt forgiveness, could have a halting effect on the current housing recovery. (Read More: Housing Alert: Short Sales May Be in Big Trouble)

“Housing is beginning to show its first signs of recovery: Home prices look like they have bottomed, there’s a lot of credit that’s being made available, at least through refinancing right now, and I think it’s a good thing,” notes Das. “I think that momentum should not be disturbed by any structural changes with respect to tax policies right now. It could be addressed 2-3 years down the pike, and I think short sales are a very important mechanism for people to be able to get out of their underwater homes. It should continue to be made easy not more difficult.”

Das says that while banks like CitiMortgage are working more quickly through the backlog of millions of delinquent mortgages, there will not be a flood of foreclosures hitting the market this fall and winter. A change in tax policy on short sales, however, could add to the foreclosure volume, as we noted in an earlier post. Citi, like other lenders, is using more alternatives, like rental programs for troubled borrowers, rather than eviction, but foreclosures will continue to work through the market for several years to come. (Read More: An Enigma in the Mortgage Market That Elevates Rates)

That continued dress, coupled with ever more litigation, regulatory uncertainty and the looming fiscal cliff, will keep mortgage rates from falling as well as some, like the Federal Reserve, might have hoped. In any event, as low rates spur more refinances, banks have and will raise rates a bit just to manage the demand.

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