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Mortgage Lending

Mortgage bankers originated $631 billion of new mortgages in the first quarter of 2007 and $694 billion in the second quarter, the lowest second-quarter increase since 2002. Relatively stable mortgage rates left little incentive for new refinancing, which constituted 49 percent of originations in the second quarter, a significant drop from their peak share of 74 percent in the fourth quarter of 2002.

Mortgage Originations

The share of mortgage-related assets (mortgages and mortgage-backed securities) on banks’ balance sheets has lessened in recent quarters but is still at historically high levels. Currently, mortgage-related assets make up 28 percent of commercial banks’ assets.

Mortgage and Commercial Lending by Commercial Banks

Mortgage loan profitability, as approximated by the spread of the effective mortgage rate (interest plus fees) over savings banks’ cost of funds, has been on the down swing since August 2006, after remaining stable for some time since the fall of 2003. Currently, the spread is at 2.94 percent. While the cost of funds as been increasing in step with the increase in the fed funds rate, banks did not fully pass the increasing costs on to their mortgage borrowers.

Spread of the Effective Mortgage Rate Over Cost of Funds

Since their peak in popularity, the share of adjustable-rate mortgages (ARMs) in total originations has decreased steadily from 40 percent in June 2004 to 8 percent in September 2007. ARMs depend on short-term rates, whereas fixed-rate mortgages (FRMs) depend on long-term rates. ARMs’ drop in popularity over the years has resulted primarily from the rise in short-term rates and the decrease in the spread between fixed and adjustable mortgage rates. The other likely reason for their sharp decline in popularity in recent months is the blame ARMs are being assigned for the mortgage market turmoil.

Adjustable-Rate Mortgages

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