A combination of historically low interest rates and reduced competition are fattening home lenders' profit margins, making up for lost volume.
Though falling rates have failed to stimulate homebuyer demand — the last reading from the Mortgage Bankers Association's index of purchase loan applications hit a 14-year low — they also mean lenders make more money on each loan they originate. This is largely because a loan with an above-market rate will fetch a higher price in the secondary market. Especially when there are fewer sellers.
"There's a ton of [investor] demand, very little supply, and what I'm selling has huge margins," said Matthew Pineda, the president of Castle & Cooke Mortgage LLC in Salt Lake City. "This year we're doing better than we did last year, and there's no stress."
More surprising is that the juicier gains on sales of new loans are more than offsetting the increased costs of origination. Tougher regulation has added expenses like licensing fees, and tighter underwriting standards have forced lenders to spend more on things like marketing — to find qualified borrowers — and back-office staffing, because they must hire more processors and underwriters to review loans.
Pineda said 80% of his business is now purchase loans, where margins are especially rich. "We're closing less volume and making more money," even though he contends that aggregators are not paying him enough for his loans.
Michael Isaacs, the president and chief executive of Residential Finance Corp. in Columbus, Ohio, said he expects to earn an average of $1,167 per loan in the current quarter, a 40% increase from the first quarter, because of reduced competition, lower interest rates and bigger spreads on the sale of loans to investors. "The overall net effect is an increase in profits per loan and an increase in basis points on volume," Isaacs said.
