Slow Refinance Market Eats at Mortgage Banker Profits


Independent mortgage banks and
subsidiaries saw a huge dip in profitability as the average they made on each
loan originated dropped from $1,082 per loan in the fourth quarter of 2010
to $346 in the first quarter of this year. 
According to the Mortgage Bankers Association’s (MBA) Mortgage Bankers
Performance Report
, lenders increased their overall revenues but profits
suffered because of higher production costs.   Only 63
percent of the firms in the study posted pre-tax net financial profits in the
first quarter of 2011, compared to 84 percent in the fourth quarter of 2010.

Marina Walsh, MBA’s
Associate Vice President of Industry Analysis said that a significant drop in
volume during the first quarter was due largely to a fall-off in
.  This made it difficult for
mortgage companies to manage staff levels which in turn caused higher
production costs.  Walsh continued, “In the first quarter of 2011, changes in
compensation plans and investor expectations are additional factors that likely
drove up loan production expenses per loan to the highest levels ever reported
for this study.”

Loan production revenues
increased substantially from an average of $2,102 in Q4 to $2,297.  Within this number, loan origination fees rose
from $1,443 to $1,569; correspondent and broker fee income decreased to $138
from $143 and “other originations-related income” rose from $516 to $590.   Expenses however more than kept pace….

Direct loan production expenses rose from $4,664
to $5,471
driven, as Walsh said, by personnel expenses which rose to $3,640
from $3,124. The cost of fulfillment and production support employees rose by
over $167
and $134 per loan respectively while sales personnel costs were down
$8 per loan.

Average production volume was
$164 million per company, down from $286 million in the fourth quarter
and the
average number of loans originated was down from 1,296 to 793.  The loss of business came mainly from the
refinancing share which dropped from 60.13 percent of volume in the fourth
quarter to 48.23 percent and in the share of the dollar volume from 63 percent
to 50 percent.  The size of the average
loan fell to $196,456 in the first quarter from $208,319.  Loan closings per production employee were
down from 3.79 per month to 2.25.

Secondary Marketing Income rose to 200.78 basis points to 187.88 bp, but
because of the decreasing average loan balance the net secondary marketing
income was down slightly from $3,870 per loan to $3,827.    Full-year 2010 production
profits were $1,054 per loan originated. In comparison, average production
profits in 2009 were $1,135 per loan originated and $305 per loan originated in

The government share of loans
originated by survey respondents rose from 34.5 percent in the fourth quarter of 2010 to 37.9
percent in the first quarter of 2011.  Prime conforming fixed-rate
loan production decreased from 58.9 percent to 53.71 of the total while prime conforming ARMs gained
96 basis points in market share to 2.95 percent.  The
percentage of ARM loans overall was also up from 3.73 percent of all lending to
4.98 percent.

Just less than 9 percent of
loans were written for borrowers having FICO scores below 650 points
while 46
percent were to borrowers with scores over 750

47 percent of loans were written with an LTV above 80 percent compared
to 42.6 percent in the fourth quarter of 2010. 
Lenders originated 99.15 percent of their loans for sale to others;
37.11 percent were sold to Fannie Mae, Freddie Mac, or Ginnie Mae.

Of the 329 companies responding
to the MBA survey 72 percent were independent mortgage companies.  312 reported involvement with residential loan
production and 174 company serviced loans. 
Those servicing loans reported an average servicing portfolio of $5.6
billion, down from $7.03 billion in the fourth quarter. They serviced 959 loans
per FTE employee or a total portfolio averaging 36,769 loans, down from 44,799
in the previous quarter.  Servicing
companies reported Net
Servicing Operating Income of $197 per loan compared to $231 in Q4 and Total
Net Servicing Financial Income $65, less than half the $138 reported in the previous

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