The commoditisation of mortgages until they are reduced to the banking equivalent of selling milk at the grocery store continues. They are low profit products that serve as introductions.  Mortgages are commodities to get customers in the door. 

This detailed analysis of the banks’ 3rd quarter expected results is illuminiating with regard to mortgages and the profitability pressures felt by the Canadian banks.

Canadian Banks & Insurance: BMO CM Preview of Cdn Banks Q3 2006 Earnings

New mortgages continue to be originated at tighter margins than a year earlier. There is little doubt that the residential mortgage business has been commoditized even further over the past year. Banks view this product simply as a way to get into the consumer pocketbook and to anchor the relationship.
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However, there are several factors that are working in support of margins:

Faster commercial loan growth.
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Less competitive posted pricing in residential mortgages. Bank of Montreal has been the most aggressive bank in discounting …  anecdotal evidence suggests that discounting by BMO off of these higher posted rates has also been reduced.
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Less competition from ING in high-interest savings accounts. … declining profitability at ING Bank (not the Property and Casualty insurer) has caused a more cautious stance on pricing

This is a non-sustainable approach for banks.  Milk works as a loss leader for groceries because its cheap.  Mortgages are not cheap.  Mortgages involve the largest investment of capital of any bank product due to their size.  Banks need a better door opener.  Mortgages have become the door opener, becuase its easy for branches.  It was never a deliberate strategy.

Relevance to Bankwatch:
The loss leader concept may not be viable for banks.  The large amount of capital involved in funding mortgages means the funding requirements are not like milk even though they are now being used that way in the branches.
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