Christopher Whalen

Historically, rising interest rates have enabled banks to earn more, but this time around in the banking industry, like much else, things are a little different.

Some hopeful souls in Washington believe the commercial banking industry will return to originating and servicing higher-risk mortgages, but most banks are more likely to continue withdrawing from the sector.

Weak profits and the threat of false claims charges are keeping banks out of the market for loans guaranteed by the Federal Housing Administration and the Department of Veterans Affairs.

Policymakers should differentiate between housing finance-related issues of real importance to the greater public interest, and those that concern only special interests.

The expansion of the Federal Reserve’s portfolio of Treasury debt and mortgage-backed securities has a bigger impact on the credit markets than paying banks interest on excess reserves.

Contrary to expectations about growing mortgage lending volumes, current industry trends suggest a gradual reduction in capacity for both lending and servicing that should alarm policymakers.

Over the next 40 years, the rate of homeownership is likely to continue to decline further as changes in demographic trends, increased regulation and stagnant incomes make that dream harder to achieve.

The cost of capital and regulatory compliance has convinced the top four banks that making home loans to American families is not worth the risk.