How far can mortgage rates fall before it stops paying for banks to make loans?

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Banks loan money so that they can make money. They spend some money in the process pushing papers and doing all of the things they need to do to run their business. So there must be some minimum interest rate below which it just wouldn’t pay banks to loan money. What is that interest rate?

Even in the modern system where banks are just producing the loan ‘product’ to sell off to investors, the same paperwork cost must exist. I imagine the cost must be even higher as more indirect investors get involved in financing the loan. (My last loan went from a mortgage broker to a big bank who promptly sold it to the Government. Everyone gets a cut and this is a simple example since my loan was never bundled, commodatized, sold to hundreds of separate investors, etc.)

So today says the average 30 year fixed loan goes for 4.24%. A 15 year goes for 4.62%. How low could the rates go before they can’t go down any more?

1 Comment
  1. Reply
    May 16, 2011 at 4:42 am

    They can go as low as there is profit margin between the cost of funds and the market lending rate. If cost of funds dropped 2% from where they are today, mortgage rates would probably also.

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