The Mortgage Bankers Association (MBA) has projected mortgage revenues will fall sharply in the second half of 2013, say Raymond James analysts Anthony Polini, David Long, and Michael Rose, who consider this to be the most important consideration for investors when looking at the banking sector.
Mortgage banking revenue
“The outlook for mortgage banking revenue is a key top-of-mind issue for investors throughout the duration of 2013 when considering revenue forecasts for banks,” they write. The MBA forecast is a 37 percent half-on-half drop in mortgage origination, down to $616 billion, and driven by a 55 percent decline in refinance activity caused by increasing long-term rates and rising rates.
Refinancing has accounted for a large majority of mortgage origination over the last few years—68 percent over the last 14 quarters and 76 percent at the end of last year—but this varies by bank. “The mix between purchase and refinance volumes varies widely at the individual bank level,” says the RJ report. “Banks that currently have a higher concentration of purchase volumes are generally better positioned to withstand the inevitable revenue pressure than those banks that have enjoyed substantial windfalls from the refinance boom.”
Thirty-year mortgages have tracked ten-year Treasury yields over the last year, even more so over the last quarter, and both have already peaked and declined slightly since early September. “We expect that near- to intermediate-term movements in mortgage rates will continue to be driven by the market’s outlook for the persistence of the bond-buying program in addition to the health of broader economic conditions – most notably the labor market,” the team of analysts write.
Margins on securitized mortgages are also dropping as rates have gone up. “The general proxy for the gains that banks record on securitized mortgage loans is the spread between the primary 30- year mortgage rate and the secondary rate based on the 30-year Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) MBS current coupon,” they write. This spread hit 1.28 percent in 2012, but it had fallen to 1.05 percent last quarter and has averaged 0.96 percent so far this quarter, further impacting mortgage bankers.