Mortgage lending is increasingly profitable, despite record-low rates

One would stand to reason that lenders’ profits are shriveling as mortgage rates continue to hover near record lows. But according to the New York Times, big banks have actually increased their profits on mortgage loans, by charging a higher spread over interest rates. The current 3.55 percent rate for a 30-year mortgage would be closer to 3.05 percent if banks took the same profit margins they did prior to the crash.

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The banks gain off of these mortgages by bundling them into bonds that they sell to investors. The bigger the difference between the interest rates banks pay to investors and borrowers pay for their homes, the more profit the banks realize, the New York Times noted. Wells Fargo, which originated 31 percent of all mortgages in the last year, reported a 155 percent year-over-year increase, to $4.8 billion, in its mortgage lending business in the first half of this year.

The Mortgage Bankers Association said the growing disparity between market interest rates and mortgage rates is a result of increased regulation that raises the costs of originating loans. But analysts counter that the higher spread is merely a function of mortgage lending consolidation, primarily in the hands of Wells Fargo, JPMorgan Chase, Bank of America and U.S. Bankcorp. [NYT]