Yes, "it’s good to be a mortgage originator right now"

Looks like Bloomberg reporters just figured out there is a transmission problem from the ultra low MBS yields to mortgage rates (discussed here).

Bloomberg (Sep 26th): - Since the Fed’s Sept. 13 announcement that it would buy $40 billion more securities per month, the rates offered for new 30- year loans have fallen by just 0.13 percentage point, compared with a drop of about 0.7 percentage point for yields on the bonds into which the loans get packaged, according to data compiled by Bloomberg and Bankrate.com. The gap between the two, which typically signals increasing lender revenue when it widens, has reached a record of more than 1.7 percentage point.

The national average 30y mortgage rate has dropped to 3.38%, a new record low. The on-the-run FNMA 30y MBS yield however is not only much lower, but has declined faster (in part due to a sharp decrease in implied duration).

Banks continue to be overwhelmed by mortgage applications, and therefore not in a great hurry to improve pricing - although declines in mortgage rates are picking up (hopefully due to increased competition).

Bloomberg: -  Fed Chairman Ben S. Bernanke’s stated goal of helping boost the housing market is being undercut by lenders’ inability to keep up with consumer demand, even as investors drive up bond prices. Banks have been slow to lower rates after being overwhelmed this year by applications to refinance mortgages.

“Think about it this way: If you had a restaurant with 100 people out the door waiting in line, would lowering prices be the first thing on your mind?” said Scott Simon, the mortgage head at Newport Beach, California-based Pacific Investment Management Co., manager of the world’s largest bond fund.

And as discussed earlier, this differential is adding to the banking sector's bottom line. That is partially why banks on average have outperformed the S&P500 by 11% this year.

Bloomberg: - Margins on sales of mortgages have widened by about 50 percent since the Fed’s announcement from the average level this year, which already was elevated, said Kevin Barker, an analyst at Washington-based Compass Point Research & Trading LLC.

“It’s very good to be a mortgage originator right now,” he said in a telephone interview.

SoberLook.com