It is a salt-in-the-wound feature of mortgage banking: when business slows, revenue booked on each new loan typically falls too.
That pattern appears to be unfolding now, as mortgage assembly lines — a bright spot for the banking industry
"Gain on sale" margins, as implied by the distance between what consumers pay and the going rate for loans in the secondary market, have fallen dramatically since the third quarter of last year (see charts).
Despite the dip in mortgage rates in May and June, the volume of applications only inched up
Meanwhile, the difference between the average rate on a 30-year, fixed-rate conforming mortgage tracked by a Freddie Mac survey and the average of a Bloomberg News index of the yield on Freddie bonds into which such loans are packaged was about flat with the first quarter at 58 basis points, remaining well off a recent peak of 88 basis points in the third quarter of last year.
(The relationship between asset prices and yields is inverted, so higher consumer rates relative to secondary market rates indicate higher profits for lenders, which mostly sell mortgages on to investors.)
Still, while margins have tracked with volume — spare capacity in the industry tends to drive prices down — they have held at higher levels than prevailed before the financial crisis.
In part, originators appear to now require more up-front compensation for liabilities and expenses that have emerged in the bubble's aftermath — that is, staggering costs to repurchase shoddy loans, tend to struggling borrowers and process foreclosures. But decimated competition may also be at play. Relatively small flutters in volume seem to have produced spikes in margins, as in the first quarter of 2009 and the third quarter of last year.
Nevertheless, as lenders continue to pay for deplorable underwriting and servicing practices, waning earnings from mortgage production is more bad news for a revenue-hungry industry.
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