Bloomberg - Fattened Margins Seen Shrinking 40% at Banks: Mortgages
Fattened Margins Seen Shrinking 40% at Banks: Mortgages
By Heather Perlberg and Jody Shenn - Feb 22, 2013
Record mortgage profits that drove earnings at Wells Fargo & Co. (WFC) and JPMorgan Chase & Co. (JPM) are fading as increased competition keeps the rates banks are offering on new loans near all-time lows.
The amount that lenders make from packaging each loan into securities and selling them to investors may be down as much as 40 percent from last quarter, Compass Point Research and Trading LLC estimates, as banks absorb most of the costs of tumbling bond prices.
After the four biggest bank lenders reported more than $24 billion of revenue from originations last year as refinancing soared, mortgage firms are accepting narrower margins as they seek to sustain demand from a shrinking pool of borrowers. Bond prices have slumped as the U.S. housing recovery contributes to optimism about the economy and investors start to brace for the end of the Federal Reserve’s debt purchases.
“Gain-on-sale margins are definitely getting squeezed,” said Rob Hirt, chief executive officer of Walnut Creek, California-based RPM Mortgage Inc., whose margins are down about 10 percent to 15 percent. “It can depend on the type of mortgage company you are,” he said. RPM for instance only grants loans directly to consumers, rather than through brokers or correspondents.
While the average rate for a 30-year fixed mortgage tracked by Freddie Mac has risen 0.25 percentage point from a record low in November to 3.56 percent this week, that’s less than half of the 0.54 percentage point-increase to 2.64 percent in a Bloomberg index of yields on the government-backed securities into which lenders package new loans. ..."
Margins on mortgages have been way too high. Government wants to lower the mortgage rates, but in the meantime yields on bonds are rising and fixing the mortgage "problem." Big juicy mortgage profits are a thing of the past. Just goes to show ... wherever there is a bulge, someone is going to squeeze it ... eventually.