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Secondary Margins Are Higher, But Rising Costs Eat Them Up

DEC 11, 2012 12:01pm ET

Research looking into the increasing gap between primary and secondary mortgage rates suggests that there are some factors to watch which affect these going forward.

The research, which the Federal Reserve Banks of New York and Boston reviewed last week, suggests in particular monitoring “the extent to which capacity expansions, new entry, changes in regulations and (in the longer term) housing finance reform” affect the pass through between the two markets’ rates.

“I can tell you what’s happening with us,” said John Walsh, president of Total Mortgage Services, when asked about the catalysts behind the spread.

He said margins have been increasing in part due to supply and demand. “There are not that many players out there and we’re all very busy.”

Walsh said margins have definitely increased, these “do get eaten up” by the need to pay higher salaries and overtime as lenders try to keep up with rate-driven loan volumes.

When asked about compliance costs, he said there is “no doubt” these are responsible for “the biggest increase in fixed costs.”

“You can’t be too careful these days,” Walsh said, noting that compliance “certainly has been a big cost in both money and time.”

Rick Allen, senior vice president and chief operating officer at MortgageMarvel, said when asked about the widening gap between investor and retail rates, “I don’t think there’s any question that regulation has required additional work on the lender’s behalf.

“I think there are a number of factors as to why those spreads are widening,” added Allen, whose division specializes in rate information for Davis + Henderson’s Mortgagebot.

Among others things, like Walsh he noted, “I think some mortgage lenders, the refinance market makes them so busy” and they have to pay for the staff and operations to sustain this.

The research also notes that declines in the values of servicing rights play into widening secondary market-primary market spread.

Servicing rights are a factor “of how long a loan is going to be on the books, how much [lenders who hold servicing] can capitalize and how long they are going to get that income stream for servicing the loan on behalf of somebody else,” Allen noted, when asked about this.

“So part of the issue, I think, is that interest rates have been low and continue to get lower and for somebody that’s servicing loans wants those loans to stay on the books for longer, so that they can recognize revenue over a longer period of time. To the extent that the life of that servicing asset gets shorter, they have to start writing off some of the income that they recognize when they created that servicing asset.

“So it’s a matter of trying to predict how long that servicing is going to be on their books,” he said, noting that with today’s low rates “a lot of loans that were written at 3.5%, 3.75% or 4.5% may be refinancing and creating losses on servicing books.”