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Mortgage Market Continues to Struggle

The U.S. market for mortgage originations has continued to struggle through the second quarter. With second-quarter GDP being revised down to an annualized rate of 1.0 percent, the weakness in the housing market has been attributed to poorer-than-expected economic performance and declining confidence in the economic recovery. According to the Mortgage Bankers Association, mortgage originations in the second quarter fell to their lowest levels since September 2008, the peak of the financial crisis. Moreover, based on data from the first half of 2011, lenders have originated only $592 billion worth of mortgages, 16.5 percent below their pace in the first half 2010 of $709 billion.

Figure 1. Mortgage Originations

The decline in mortgage originations has come as contract interest rates have hovered around near-record lows. According to the Federal Housing Finance Agency, the contract interest rate on a new single-family home in June was 4.45 percent, up 29 basis points from the decade low of 4.16 percent and 150 basis points below the decade’s average interest rate of 5.97 percent. The same holds true for interest rates on previously occupied homes, where the current contract rate is only 20 basis points above the low of 4.42 percent recorded in November 2010 and nearly 150 basis points below the decade average of 6.09 percent.

While contract interest rates have steadily declined through the recession, origination fees on new mortgages have risen. According to the Federal Housing Finance Agency, origination fees on a newly built home were 1.13 percent of the mortgage in June, the highest level since August 2009, when origination fees were 1.15 percent of the mortgage. Origination fees have also increased on previously occupied homes; currently at 0.92 percent, origination fees on previously occupied homes are only 3 basis points below the decade high of 0.95 percent. The increase in origination fees has not been a recent occurrence; in fact, mortgage origination fees have been much higher since the financial crisis began than they were before it.

The trend toward higher origination fees on mortgages has been ongoing since the second quarter of 2007. From the first quarter of 2000 to the second quarter of 2007, the average mortgage origination fees on a newly built home were 0.63 percent. However, from the third quarter of 2007 to the present, the average origination fees on a newly built home have averaged 0.87 percent. Moreover, origination fees have also been higher since the onset of the crisis on previously occupied homes, increasing to an average of 0.6 percent from 0.42 percent prior to it. The increase in origination fees is important to note because while most costs associated with homeownership have declined through the recession, the up-front costs have risen.

While it is difficult to tell what the impact of higher up-front costs have had on the origination market, it is possible that higher origination fees, coupled with lower economic growth, have caused consumers to pause when deciding whether right now is the appropriate time to get a new mortgage for purchasing a home.

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