Pops in mortgage volume typically drive profit margins on loan production wider, in part because strains on the industry's capacity reduce price pressures on competing originators.

But a relatively modest increase in mortgage activity during the middle of this year appears to have been accompanied by unusual distances between what consumers pay and the going rate for mortgages in the secondary market.

Originations jumped by a fifth from the first quarter, to $428 billion in the second quarter, and were headed toward $403 billion during the third quarter according to a Sept. 10 projection from the Mortgage Bankers Association.

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 surged 30 basis points from the first quarter, to 88 basis points in the third quarter (see charts below).

The relationship between asset prices and yields is inverted, and higher mortgage rates for homeowners relative to secondary market rates should plump earnings for lenders, which mostly sell mortgages on to investors, and apparently favorable conditions in the third quarter follow strong "gain-on-sale" margins during the previous quarter.

There was a much bigger upswing in mortgage volume the last time the gap between consumer and secondary market rates was so large — in early 2009, when the Federal Reserve's shock-and-awe program of mortgage asset purchases touched off a wave of refinancings. (The spread does appear to have retreated a bit in September compared with the first two months of the third quarter, and the MBA's index of mortgage applications has trended down in recent weeks.)

To be sure, a wide variety of factors play into consumer mortgage pricing. For example, while early 2009 was one of the most intense phases of the banking crisis, and wounded institutions were guarding capital and particularly reluctant to lend, the mortgage industry's resources are still being stretched as it struggles with huge numbers of foreclosures, distressed borrowers and bad loans. It is still paying for faulty underwriting during the bubble years through forced repurchases of huge amounts of flawed mortgages.

Still, the persistence of high spreads, and their sensitivity to mild swings in activity, strongly suggests that decimated competition has conferred considerable leverage on surviving lenders.

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