Banks in the United States have figured out certain ways to derive handsome profits from their mortgage lending operations despite the historically-low mortgage interest rates, a battered housing market and very restrictive guidelines for borrowing.
Lenders have managed to squeeze out considerable revenue from mortgages since the collapse of the credit markets in 2008 through a series of interesting measures. Now that the housing market is in recovery mode and mortgage demand is rising, banks stand to cash in even more without having to increase their spending.
According to a research paper recently introduced before the Federal Reserve Bank of New York, mortgage origination has gotten more expensive, a situation that has prompted banks to compensate accordingly by adjusting their fees in the secondary markets without breaking too much of a sweat. As usual, borrowers end up picking up the tab.
The New York Fed study is titled The Rising Gap Between Primary and Secondary Mortgage Rates. One section of the research paper is dedicated to looking at profits and costs per mortgage originated, measured at $2 for each $100 of mortgage principal and interest funded in the period between 2005 to 2008. This means that a $100,000 mortgage could have produced a profit of $2,000 before 2008. This measurement, which the researchers pegged only to fixed-rate mortgages only, has gone up to $4 and $5 in recent years.
The rationale behind this increase has a lot to do with the secondary market, in which investors speculate in the mortgage-backed securities marketplace. Investors are not taking the same chances as they did earlier this century; they are closely scrutinizing their potential investments and demanding certain guarantees. Such judicious behavior puts financial strain on the originators, which respond by raising their fees.
Just about every aspect of mortgage origination has gone up, from servicing to rate locks and from the fees charged by Fannie Mae and Freddie Mac to the licensing of loan officers. In a way, Fannie and Freddie are responsible for these higher fees and increased profits due to their mortgage repurchase demands. The potential losses from these loan put-backs drive lenders to spend more on underwriting and on legal counsel to protect against the costly demands.
By all accounts, banks should be thoroughly constrained from deriving profits from current mortgage operations, but the fact is that they are reticent to increasing their capacity by hiring. It is difficult for new players to come into the market due to barriers to entry, so origination is largely concentrated on a just a few banks, which in turn are satisfy to keep their staffing levels low.