Mortgage Fees Highest Since 2000

2009 March 24

March 24 2009 - David Rapaport, a professor at the University of California San Diego Medical School, is paying an upfront fee of $3,500 to refinance his mortgage at 5.13 percent. A year ago, his rate was 6.25 percent and there were no fees.

“I’m happy just to be able to get a refi and reduce my monthly payment,” said Rapaport, 57, who owns a two-bedroom townhouse in San Diego, where home prices have dropped 32 percent since June 2006. He is saving $264 a month with the new loan from San Ramon, California-based CMG Mortgage, meaning it will take about a year to recoup the fees he paid.

Home refinancing is forecast to hit a two-year high and banks are reaping the profits as mortgage origination fees are the costliest in eight years, according to data compiled by the Federal Housing Finance Agency. Banks are raising loan costs for customers ahead of an April 1 increase in the “adverse market” fee that Fannie Mae and Freddie Mac charge lenders.

“We came through an incredibly competitive environment in the last few years when banks were practically giving away loans, and now they’re able to widen their profit margins,” said Anthony Polini, an analyst at Raymond James & Associates Inc. in New York. “Mortgage lending is having a positive contribution to earnings growth.”

The average cost of getting a U.S. mortgage was $640 per $100,000 in December and January, the highest since October 2000, according to Federal Housing Finance Agency data. In 2005, the end of a five-year housing boom, the cost was $280 per $100,000, the lowest on record.

Rates Close to Zero

Banks are benefiting as the Federal Reserve benchmark rate stands close to zero, the lowest in its history. The difference between the fixed rates that banks charge for mortgages and the Fed rate that shows their cost of borrowing is averaging 4.83 percentage points in the current quarter. That’s the second-widest spread since 2004, after the fourth quarter’s high of 4.89 percentage points, according to data compiled by Bloomberg.

The average spread between fixed mortgage rates and 10-year Treasuries is 2.3 percentage points. That’s close to the 22-year high set in the fourth quarter.

The Mortgage Bankers Association today boosted its forecast for 2009 home-loan originations by $800 billion to $2.78 trillion as a wave of refinancing and low interest rates spur homeowners to seek out new loans.

Mortgage Refinancing Boom

Refinancing will total $1.96 trillion in 2009 and purchase originations will increase to $821 billion, the group said in a statement. Total originations may rise to the fourth-highest on record.

“Banks are able to borrow short and lend long,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. “They get their financing at rock bottom rates and charge higher fees, meaning their margins are extremely high.”

Wall Street may have found a way out of its misery as earnings from creditworthy borrowers help rebuild the banks’ balance sheets. Eight months after buying unprofitable Countrywide Financial Corp. to become the largest U.S. mortgage lender, Bank of America Corp. Chief Executive Officer Kenneth Lewis told an audience in Boston on March 12 he won’t need any additional bailout funds from the Treasury.

A “boom” in refinancing is spurring his mortgage unit to hire staff to handle the volume, Lewis said.

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