Independent mortgage lenders may have hit their high point of the year as they booked an average profit of nearly $1,400 on each loan originated during the second quarter, a figure that at least one housing expert expects to significantly decline in the coming months.
Spurred by a refinancing boom and low interest rates, lenders were able to spread their fixed costs over a larger number of loans, the Mortgage Bankers Association said in a statement this week announcing their profit study. It's a 25 percent increase from the first three months of the year.
The money train continued for lenders. Low rates made refinancings more desirable, as homeowners cashed in on the lower rates to save money in the long run. Those same rates -- plus the homebuyers tax credit established by the federal government and the drop in home prices seen across the country -- made home buying more affordable for those who want to buy but have largely stayed on the sidelines.
To that end, lenders have been cashing in. During the first quarter independent lenders made an average of about $1,100 profit per loan -- a 635 percent increase from the last three months of 2008.
The return of "junk fees" -- unnecessary fees tacked onto mortgages and eaten by borrowers -- also added to the increased profits, experts say. With fewer lenders in the market, borrowers are increasingly being forced to accept a loan on their lender's terms. It's a reversal of the boom times, when borrowers juggled competing offers from multiple lenders, who then made their money off selling, securitizing, or servicing the loan.
The decreasing influence of brokers also plays a role in lenders' increasing profit numbers. In 2005 brokers were responsible for 31 percent of all mortgages; in the second quarter of this year they had 15 percent of the market, says Guy Cecala, publisher of Inside Mortgage Finance, a leading trade publication that compiles housing data. With fewer brokers to pay, lenders keep more of the profit.
But those profit figures are expected to significantly drop in the three-month period that ended in September, Cecala says. He thinks profits per loan will be less than $1,000.
The second quarter marked the high point for the year in loan originations, he says. Lenders could dictate terms to borrowers as fewer home buyers and homeowners looking to refinance shopped around. Most were content with the low rates, which have hovered around 5 percent for most of the year. So fees were tacked on, yet largely accepted by borrowers.
Since then, there's been a drop in originations -- especially in refinancings -- and that's going to affect the profit numbers, Cecala says.
"The environment has favored lenders," he says. "But it won't continue as borrowers looking to refinance get scarce. At some point, we're going to run out of refi borrowers."
Cecala points to the current five percent interest rate. Unless it drops to four percent, there's not going to be a new crop of homeowners looking to cash in. Those who would have already largely taken advantage, he says.
As the number of borrowers drops, lending will get more competitive. Things like origination fees and other tacked-on fees will start to come down as lenders compete to attract borrowers. It'll take some time, but fee income will eventually decline, predicts Cecala.