1) - As we all know, the ONLY buyers of mortgages on the secondary market are Fannie, Freddie and FHA all government sponsored eneties taht are for all intents and purposes TOTALLY INSOLVANT. The Obaman administration has not taken the neccessary actions (wide and deep "clean sweep" criminal prosecution of mortgage fraudsters, with daily perp walks on nightly news along with multi-decade prison sentances) to clean up the industry. Finreg is a joke that will only add cost NOT aditioanl transparency or protections. The Republicans are going to stop the federal props to GSA's and hence THERE SOON WILL BE NO SECONDARY MARKET FOR RESIDENTIAL MORTAGTES.
2) With no place to sell mortgages, that means banks in general will have to hold any loans they make today in thier own portfolios, "forever".
3) We are at historically low interest rate levels right now, but there are huge inflation expectations and therfore expectatiosn of a rising interest rate environment. (See GLD, SLV, CORN, etc)
4) So Third Fed, knowing any loans made now will stay in the portfolio, and that rates are likley to rise, is doing the logical thing and offering ARMs instead of vanilla fixed rates. That way they are building a portfolio that will rise with any anticipipated interest rate increases and they are thus reducing thier exposure to interest rate risk. This reduction in interest rate risk will be increased even more as they REFINANCE customers out of low FIXED RATE loans into even lower (for now) adjustable rate loans.
Effective July 1, 2010, Fannie Mae, the Association’s primary loan investor, implemented certain loan origination requirement changes affecting loan eligibility that we did not adopt. Accordingly, the Association’s ability to reduce interest rate risk via our traditional loan sales of newly originated longer-term fixed rate residential loans is limited until the Association either changes its loan origination processes or Fannie Mae, Freddie Mac or other market participants, revise their loan eligibility standards. In the absence of such changes, future sales of fixed rate mortgage loans will be predominately limited to those loans that have established payment histories, strong borrower credit profiles and are supported by adequate collateral values.
In response to this change, we are currently marketing a new adjustable-rate mortgage loan product that provides us with improved interest rate risk characteristics when compared to a long-term, fixed-rate mortgage. ----- If they can't write Home Equity Loans per the OTS MOU, how do they reduce interest risk other than this way?