** For the Mortgage Peeps

It doesn’t help lender’s relationships with their warehouse banks and correspondent investors when independent mortgage banks, and mortgage subsidiaries of chartered banks, reported a net loss of $200 for each loan they originated in the fourth quarter, according to the Quarterly Mortgage Bankers Performance Report released by the Mortgage Bankers Association. The cost to originate increased to $8,611 per loan in the fourth quarter, up from $8,174 per loan in the third quarter, higher than average on the coasts, lower in the mid-section of the U.S., due to loan size and overhead costs.

But rates have come down, and lenders once again find themselves in a tricky position trying to balance operations capacity and production capability. Some are using forecasting tools of companies like Riivos (contact Jeffrey Axelrod for more information) while others are contemplating the usual “staff up, downsize later” cycle and thinking about trying to hire back Ops staff for the hoped-for pick up in biz.

On that topic I received a note from industry vet James Johnson. “Rob, as a capital markets person you have to be very intrigued with this recent drop in rates. Are rates headed even lower and is there some sort of refi opportunity on the horizon? It seems a bit unthinkable, but I am actually in the camp where that is a real possibility. Right now 30-year fixed is close to 4.25% and needs to get to 4.0% or probably something with a 3 handle before we see any real refi activity. I have a few thoughts on what company owners might contemplate doing.

“The real problem right now is that volume and capacity are significantly out of balance and that is creating today’s margin compression. Capacity probably needs to shrink by something like 20%. But that would require a head count reduction of something like 30-40% and it is hard to see that happening. LO’s continue to recycle at a different company rather than leave the business, thus making it a very slow capacity reduction process. If I am right about this, it will be 3-5 years before we rebalance.