Good News: Mortgages are Still Making Bankers Rich

bank signStories of a struggling housing market still abound. Home prices continue to drop in some cities, and they are stagnant in most others. There’s a glut of unsold inventory. Credit is tight. Homeowners are underwater. You know the story.

But don’t shed a tear for the bankers who are out there making mortgage loans. They’re doing okay.

According to the latest data from Inside Mortgage Finance, mortgage companies reported strong financial gains for the first quarter of 2012. Much of it was the result of the latest wave or refinancing.

Collectively, the top nine mortgage companies in the U.S. raked in about $4.8 billion worth of income from home loan generation and sales (into the secondary market). That’s good. I’ve been worried sick about them.

The U.S. banking industry as a whole earned more than $35 billion in profit during the first quarter of 2012. It was the best-performing quarter of the last five years.

Bank profits will likely continue to rise this year, as home buyers and homeowners alike chase after super-low mortgage rates. Last week, the Mortgage Bankers Association predicted that refinancing activity for 2012 alone could exceed $800 billion.

It seems like a paradox. There are fewer home loans being made today, as a result of tightened credit standards. But mortgages are generating more revenue for the banks that make them. How is this possible? The answer, of course, is that mortgage loans are more profitable today than they have been in years past. It has to do with the “gain on sale,” an industry term for the amount of money lenders earn for each home loan they generate.

For instance, here’s a snippet from a recent SunTrust press release: “Compared to the first quarter of 2011, mortgage production income increased $64 million, primarily due to higher loan production and increased gain on sale margins.”

The average gain on sale for mortgages is currently around $3,000 per loan, higher than in the previous years.

Big Bank CEOs are Bankin’

The list below shows the largest mortgage lenders in the United States (currently), followed by what their CEOs earned last year.

  1. Wells Fargo — CEO John Stumpf had a total pay package of about $19.8 million in 2011. Source: Bloomberg
  2. JPMorgan Chase — CEO Jamie Dimon earned $23.1 million in take-home pay last year. Source: Wall Street Journal
  3. U.S. Bancorp — CEO Richard Davis pulled in around $13.6 million in 2011.
  4. Bank of America — CEO Brian Moynihan made $8.1 million in total compensation in 2011. Source: Reuters

HARP 2.0 is also being kind to mortgage bankers. The government-driven refinancing program allows underwater homeowners to refinance their homes. And there is no shortage of those homeowners at present. The program could generate as much as $12 billion dollars in revenue for mortgage servicers this year.

2013: The (Uncertain) Year of the Qualified Mortgage

New mortgage rules could dampen profits for bankers in 2013. The so-called qualified mortgage (QM), and the closely related qualified residential mortgage (QRM), will establish new guidelines for home loans and the lenders who generate them. I wrote about this a couple of weeks ago.

These rules could shrink the pool of qualified buyers, which in turn could reduce overall profits for the mortgage industry. I know. It’s terrible to even think it. Lighting cigars with a rolled up ten-dollar bill is just not the same as lighting them with a Benjamin.