Banks built up their holdings of mortgages as market conditions generated such remarkable volumes of these loans, and as weak demand for commercial loans left a void in bank balance sheets and income. Historically low rates on new mortgage loans, together with rapid prepayment of higher-rate mortgages, have sharply reduced yields on bank mortgage portfolios.
The preliminary data for 2003 indicate that the effective yield on mortgage-backed securities, including adjustable-rate products, fell to 4.22 percent; by late in the year, yields had fallen to only about 3.90 percent. Along with this pressure on yields, banks have faced an interesting new pressure on funding costs.