Hell of a time to be a mortgage banker

26 July 2010

It’s a wonder that mortgage bankers in the US aren’t jumping off tall buildings at the moment. Their industry is facing a spate of new regulation and thanks to a recent reform bill homes are selling at an anaemic pace. Meanwhile, new capital rules that require lenders of all charters to post more cash are stoking predictions of further consolidation. In short, it’s a bad time to be a mortgage banker on this side of the Pond.

Then again, the residential finance executives who are still alive today and plying their trade over here can be an optimistic lot. Many are hoping for yet another wave of refinancing to save their cookies.

Don’t get me wrong. Profit margins are still pretty decent, but they are slipping.

A recent study from the Mortgage Bankers Association, the industry’s premier trade group, states that the average profit on newly originated loans fell to $606 per unit in Q1 2010 - down 32% compared with the previous three-month period. But a profit is a profit, even on reduced volumes.

Many lenders continue to enjoy a wide spread between the cost of funds and the yield on their loans but firms are having a hard time managing their staffing levels. The problem boils down to this - companies with decent origination volumes are trying to keep their staffing lean because they have a nasty suspicion that loan production could fall off a cliff at any moment.

Do you blame them? US unemployment is just below 10% and the recent expiry of a federal tax credit has resulted in home buyer traffic slowing to a crawl. Nobody wants to buy a house if they fear losing their job and many consumers are sitting on the fence anticipating that house prices may plunge another 5% or 10%, depending on which city they live in.

Firms are keeping staffing lean because they suspect loan production could fall off a cliff at any moment

But firms that are trying to stay lean and mean also are hurting themselves to some extent, because now they don’t have enough workers to handle applications and loan underwriting. This means frustrated borrowers can walk across the street to the competition, making it a ’damned if you do and damned if you don’t’ situation.

So the US is far from being out of the woods when it comes recovering from the bursting of its housing bubble, but hope lies in another refinance boom. A few days ago the yield on 10-year Treasury bonds fell to just under 2.9% - the lowest level in 15 months. As any student of mortgage banking knows, when the yield on the 10-year bond falls so do residential rates. This equation never fails.

Last week a home buyer or refinance applicant with a good credit history could get a 30-year fixed rate loan - the product of choice for any sane American - at 4.5%. But now, with the 10-year bond declining yet again, there’s talk that a 30-year mortgage might soon be had for just 4%. Maybe less.

And these aren’t just pipe dreams - they are real dreams dancing through the minds of mortgage bankers from coast to coast.

Last year loan production was a respectable $1.9trillion but this year it could be a gruesome $1.1trillion. At least, that was the early estimate when it looked as though mortgage rates would slowly rise throughout 2010. Now, with yields on the 10-year bond heading south, who knows?

Of all the new loan applications coming into lenders’ offices and computers every week, about 80% are for refinance loans - a historic high.

ortgage bankers only make money if they are originating loans and they’ll take what they can get right now - refinance or not.

Of course, there’s always the worry that if they refinance every eligible customer now there will be no business left for them next year and in 2012. But of course, by then employment will hopefully be on a more solid footing and home buyers will be starting to flock back to the market en masse. Let us pray.