Mortgage Companies in Bind Loan Origination Becomes Difficult with Short-Term Rates Rising, Long-Term Rates Low

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Byline: Liz Hester Medill News Service

With long-term interest rates near historic lows, how's a guy like Steve Khoshabe, chief executive officer of United Financial Mortgage Corp., to turn a profit in the mortgage business? Loaning out more money, that's how.

Oak Brook-based United Financial issues home mortgages directly to consumers in high volumes, but that's not a very profitable business currently.

Craig Woker, a stock analyst with Morningstar Inc., said mortgage companies make the most money on servicing loans because it requires little capital.

Origination of loans, actually lending the money, is "not that attractive of a business" given the current interest rate structure. If a company's main business is originating mortgages, "that means they'll get killed" in today's market, Woker said.

Mortgage companies are being squeezed because short-term interest rates are rising, while long-term rates are lower than they were a year ago. To combat the shrinking returns, United Financial Mortgage tries to "increase overall volume of business and watch overhead," Khoshabe said.

"The flattening of the yield curve" - the unusual, narrowing gap between long-term and short-term interest rates -"causes our borrowing costs to go up and that puts pressure on our margins," Khoshabe said. For the majority of its loans, United Financial borrows money in the short-term market and lends it out long-term, making profit depend on interest rate spreads.

United Financial funded $791 million in mortgage loans in its fourth quarter ended April 30, up $92 million from the year-ago quarter. But the company reported a loss of $1.5 million, or 24 cents per share, compared with a profit of $1 million, or 17 cents per diluted share, in the previous year's fourth quarter. …