While the fed may end up lowering rates in the near term, banks are beginning up the interest they will pay on savings vehicles. Why?
The collapse of the sub-prime market is having a dramatic impact on the mortgage market. In the past few years, banks and mortgage companies made money the follow way:
1. Provide the mortgage to the buyer;
2. Package the mortgage with others and sell it to other banks or as Mortgage backed securities.
3. By repeating this process over an over, the bank can make more loans over and over without having an increase in deposits.
With new mortgage backed securities basically unmarketable, the only way banks can make loans is to increase deposits.
In particular, companies like Countrywide Bank will be looking for deposits.