It may seem like a strange question given that mortgage rates have been in a crater for the past year or so, but according to the New York Times loan rates would actually be lower if lender fees had not increased. According to the paper, loan rates are roughly half percent higher than they should be, an expense which adds about $30,000 to the cost of a $300,000 over its lifetime.
The lending industry argues that higher fees are justified because the cost of business has increased as a result of new regulation — meaning they continue to moan about Wall Street reform. But a look at industry numbers shows that while costs are up so are profits.
On the origination front, the Mortgage Bankers Association said in June that “independent mortgage banks and mortgage subsidiaries of chartered banks made an average profit of $1,654 on each loan they originated in the first quarter of 2012, up from $1,093 per loan in the fourth quarter of 2011.”
On the back end, “while per-loan production expenses increased, secondary marketing gains improved as primary-secondary spreads widened,” said Marina Walsh, the MBA’s associate vice president of industry analysis. “Secondary marketing income rose from $4,355 per loan in the fourth quarter of 2011 to $5,011 per loan in the first quarter of 2012.”
But what about those higher costs?
Indeed, the expense to originate a mortgage is up — the “net cost to originate” said the MBA was $3,413 in the first quarter versus $3,324 per loan in the fourth quarter. That’s an increase of $89 per loan.
What’s interesting about the rising margins associated with mortgage loans is that the new profits are not going to mortgage brokers. The middlemen who used to connect borrowers and lenders are being frozen out of the marketplace as major banks reduce or refuse to do business with them. As examples, Wells Fargo, Bank of America, Citigroup and JP Morgan Chase have all closed or contracted wholesale windows that bought loans from mortgage brokers.
With greater market share and the efficiencies of scale it’s not surprising that lenders are reaping bigger profits. That’s fine — but there should also be more benefits to borrowers, say lower costs for financing and refinancing, more modifications for those facing the possibility of foreclosure and more staff to handle stalled short sales. Plainly the margins are there for everyone to benefit.