Interest rates jumped, pipeline pressure fell, and profit margins on mortgage production appear to have retreated in the fourth quarter, according to an analysis from American Banker.
Judging from the difference between yields in the secondary market and rates that consumers pay, however, profitability on originations continued to be healthy during the period. (The relationship between asset prices and yields is inverted, so higher consumer rates relative to secondary market rates indicate higher profits for lenders.)
Still, with higher rates dampening demand for refinancings, the industry has forecast a steep decline in production volume, which, if the historical pattern holds, could simultaneously lead to a further erosion of "gain-on-sale" margins.
The average rate on a 30-year, fixed-rate conforming mortgage increased 36 basis points from September to 4.71% in December, according to Freddie Mac, failing to keep pace with a 66-basis-point increase in the yield on Freddie bonds into which such loans are packaged.
On average across the final three months of the year, consumer rates exceeded secondary market rates by 67 basis points, well off a blowout 88 basis points in the third quarter, but still elevated compared with the middle of the last decade, when production volumes were higher.
Gain-on-sale margins tend to rise when demand for loans strains industry capacity and reduces price pressures on competing originators, and the industry tends to build up capacity in reaction, curtailing margins.
In a few weeks the Mortgage Bankers Association will release its 4Q 2010 profitability study.
