Lost amid the waterfall of news this week was the fact that the average profit on mortgages has fallen to their lowest point since the Mortgage Bankers Association started recording the data in 2008.
Last quarter, mortgages paid lenders an average profit of $150. It was $743 in the fourth quarter of 2012.
Here’s what my old friend Bob Rubin told National Mortgage News about the falling mortgage margins:
“People were on top of the mountain, never thinking the mountain would have a sharp edge and people would fall off,” says Bob Rubin, a consultant with the Business Loan Connection, Southfield, Mich.
I raise this point about profitability because with such narrow mortgage margins, banks are going to have to find yield elsewhere. This is likely yet another factor leading banks to the innovation trough.
Indeed, Rubin said as much:
Companies are scrambling to break even, but they are not, and that is creating “interesting opportunities,” he says. Firms are exploring new niches such as lower credit score products looking for customers.
I expect more product exploration to come. The mortgage numbers are just plain ugly. With rates on the upswing, mortgage production has become that much more difficult. In truth, it is almost a year now since mortgage finance began its downward turn. By the third quarter of 2013, non-interest mortgage income declined 65% on a year-on-year basis at JP Morgan Chase, for example. The reason: 45% lower mortgage applications. The downward spiral has left mortgage profitability at record lows.
Not surprisingly, the mortgage startup landscape is, to say the least, bare. In lending, it’s peer-to-peer that is attracting VC money, not startups for the mortgage space. And who can blame the investors? Google News “mortgage” from 2009 and you’ll know why.
My sense is this can’t continue. This margin compression begs for more startups — and more investment. Mortgages are too important to bank balance sheets, and with the credit cycle where it is, the demand for operational efficiency amplifies. Or, to paraphrase Bob, I’m expecting more attempts to climb the mortgage mountain in the coming months.