Steep Yield Curve Portends Good Things for Mortgage Profits

The steepness of the curve formed by the range of yields between two-year and 10-year Treasuries has reached never-before-seen levels -- a good sign for mortgage originators whose profits are derived from the difference between their cost of funds and the residential loans they originate. The bad news for lenders is that rising mortgage rates could cause application volume to slow even though their cost of funds will stay cheap. The steep yield curve could be conducive to sales of "long" paper on collateralized mortgage obligations, "but sometimes if the market is selling off rapidly as it has been this week" investors might wait for it to stabilize, said Art Frank, director of mortgage-backed securities research at Deutsche Bank Securities. Over the course of the past week the 10-year yield has been as low as 3.50% but as of late Tuesday morning it was above 3.70%.