Decline in Originations Hurting Lender Profit


Financial concerns continued for independent mortgage banks and
mortgage subsidiaries of chartered banks as they reported, on average, declining
profit margins
in the third quarter.  The
Mortgage Bankers Association’s (MBA’s) newly released Quarterly Mortgage
Bankers Performance Report shows that the 342 banks that responded to its third
quarter survey reported a net gain of $480 on each loan they originated
compared to $580 in the second quarter.  

“These are very
challenging times for independent mortgage bankers, with the average pre-tax
net production income per loan reaching its lowest level for any third quarter
since inception of our report in 2008,” said Marina Walsh, MBA’s Vice President
of Industry Analysis. “Profitability continues to be hindered by high costs and
low productivity. We expect fixed costs to remain elevated, and competitive
pressures will continue to hamper production revenues in the winter months.
Therefore, mortgage banker profitability will likely remain challenged.”

Added Walsh,
“Mortgage servicing remains a bright spot for bankers, with relatively low
delinquencies and high loan balances driving up per-loan servicing revenues.
Including all business lines (both production and servicing), 71 percent of the
firms in the study posted a pre-tax net financial profit in the third quarter.
Without servicing, that percentage would have dropped to 52 percent.”

The profitability
problems are tied, in part, to declining loan originations.  The volume by count per company declined from
2,180 loans in Q2 to 1,948 loans and the dollar volume from $531 million to
$474 million.  However, for the mortgage
industry as a whole, MBA estimates that production volume was up slightly from
the previous quarter.

The average pre-tax
production profit was 20 basis points (bps) in the third quarter, down slightly
from an average net production profit of 21 bps in both the second quarter of
2018 and the third quarter of 2017.

Total production revenue
(fee income, net secondary marking income and warehouse spread) increased to
358 bps in the third quarter, up from 347 bps in the second quarter. On a
per-loan basis, production revenues increased to $8,654 per loan, up from
$8,458 per loan in the second quarter. Net secondary marketing income increased
rose from 271 bps in the second quarter to 280 bps or from $6,650 per loan to $6,802.

Total loan production
– commissions, compensation, occupancy, equipment, and other
production expenses and corporate allocations – were $8,174 per loan compared
to $7,877 in the previous quarter. For the period from the third quarter of
2008 to the present quarter, loan production expenses have averaged $6,312 per

Personnel expenses
averaged $5,405 per loan in the third quarter compared to $5,195 in the second
quarter.  Per capita loan originations by
production employees including sales, fulfillment and production support,
decreased slightly to 1.9 from 2.1 a quarter earlier.  

Including all business
lines (both production and servicing), 71 percent of the firms in the study
posted pre-tax net financial profits in the third quarter, down from 77 percent
in the second quarter.  

Purchase loans accounted
for 82 percent of total originations by dollar volume.  MBA estimates this is higher than the
purchase share industry-wide which it estimates at 76 percent. Lenders successfully
originated 75 percent of loans for which applications were begun.  The pull-through rate in the second quarter
was 72 percent.

The average loan balance
for first mortgages reached a survey high of $255,539 in the third quarter. The
average was $255,136 in the second quarter.

Eighty percent of the companies
that responded to MBA’s third quarter survey were independent mortgage
companies.  The remainder were subsidiaries
and other non-depository institutions.

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