With a recent 4.32% print for the Freddie Mac survey rate, primary mortgage rates have hit all-time lows. However, mortgage rates remain stubbornly high compared to rates in the capital markets. The spread between the survey rate and the Fannie Mae current coupon rate has widened to around 100 basis points, well above its five-year average of +58. While this measure is an imperfect proxy for the relationship between consumer rates and market yields, it nonetheless implies that mortgage rates remain "sticky." This relationship is dictated in large part by industry economics, driven by the level of lending activity relative to the mortgage industry's capacity.

As represented by staffing levels, lenders' processing capacity is currently quite low. Data from the Bureau of Labor Statistics indicate that 274,000 workers were employed by the mortgage industry as of last July, less than half of its peak level of 504,000 reported in early 2006. Moreover, these numbers must be taken in the context of the profound changes in the industry. While the decline in employment is in part attributable to a sharp (60%) drop in the number of loan brokers, employment in "real estate credit" has also dropped by roughly half. This suggests fewer employees for key back-office functions such as loan underwriting and closing. While some of the decline in employment represents the demise of thousands of jobs in subprime lending, mortgage industry employment has also been boosted by hiring for areas such as loan servicing and repossessed property management and liquidation. It's difficult to avoid concluding that diminishing resources are being dedicated to the core tasks of processing loan applications and closing transactions.

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