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Mortgage Lenders' Margins Fatten in 1Q Despite Lower Volumes, QM

JUN 26, 2014 9:00am ET
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Mortgages were more profitable to originate in the first quarter even though a lot fewer were made, according to the accounting firm Richey May. Secondary marketing gains came to the rescue.

Margins on loan production jumped by 28 basis points from the fourth quarter of last year, the Englewood, Colo. firm found in a report scheduled for release Thursday. 

The increase was driven by gains on secondary market sales, which increased by 39 basis points over the same period. Origination fees dropped 11 basis points.

"Independent mortgage bankers are taking less in origination fees, but are making more from gains on sale into the secondary market," said Kenneth Richey, the firm's managing partner, in a press release.

The survey results reflect a broader response by banks to the Qualified Mortgage rule, which imposed a cap of 3% cap on fees that lenders can charge for originations. With the limit on fees in place, Richey said, banks have turned to secondary sales to increase profits.

"Rather than earning on the front end, they're increasing margins on the secondary sale," he said.

Loan production overall fell by 18% from the end of last year, the firm's quarterly survey of mortgage activity showed. Purchase volume dropped for the third consecutive quarter, down by 13.7%.

Additionally, Richey May found that the principal balance of unfunded rate locks—an option to guard against swings in interest rates—increased by 40.5% in the first quarter, rebounding to levels last observed in the third quarter of 2013.

Pre-tax profits increased by 0.25%, largely due to the gains in secondary market activity, as well as bulk sales of servicing rights.

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