Profits Down at Mortgage Banks in Q4 2010

Declining secondary marketing income driven by rising interest rates eroded profits at independent mortgage banks and their subsidiaries during the fourth quarterrnof 2010. </p

According to the MortgagernBankers Association’s (MBA) Mortgage Bankers Performance Report those profits dropped to an average of $1,082 per loan from $1,423 inrnthe previous quarter.  However, in thernfourth quarter of 2009 the figure was $890. A total of 321 institutions,rn310 of which reported residential production business, responded to thernquarterly survey.  70 percent of thosernwith residential production business were independent companies.</p

Net secondaryrnmarketing income decreased from $4,069 (203 basis points) per loan in Q3 to $3,870 (188 basis points) in the fourth quarter.  One year ago that income was $3,118.  84 percent of the firms in the study posted pre-taxrnnet financial profits in the fourth quarter of 2010, compared to 88 percent inrnthe third quarter of 2010 and 76 percent in the fourth quarter of 2009.</p

MBA said that with thernfavorable third-quarter refinancing rally after an inauspicious start in thernfirst quarter 2010, full-year 2010 production profits will be lower than 2009rnbut probably within $200 per loan of 2009 levels.  In comparison, averagernproduction profits in 2009 were $1,135 per loan originated. Average productionrnprofits in 2008 were $305 per loan originated. MBA will release its annualrnsummary report for 2010 by early June.</p

Rising rates, especially inrnDecember, affected net gain on sale for many independent mortgage bankers.  Marina Walsh, MBA’s Associate Vice Presidentrnof Industry Analysis said, “During the month of December, the averagernthirty-year fixed mortgage rate was 4.82 percent, about 37 basis points higherrnthan in November and 55 basis points higher than in October.  Consideringrnsuch variables as the timing of rate locks, pull-through expectations, andrnhedging effectiveness, some mortgage bankers’ earnings were hurt by the rapidrnchange in rate environment in the fourth quarter.”</p

Respondents reported that loan volumes continuedrnto increase though.  The institutions originatedrnan average of 1,296 loans during the quarter compared to 1,090 in Q3 and 1,086rnin the fourth quarter of 2009.  The averagerntotal volume of loans was $285,788,000 compared to $237,385,000 in the previousrnquarter and $215,472,000 in Q4 2009 and the average loan balance was $208,391rnagainst $205,863 and $191,838.  Productionrnemployees closed an average of 4.01 loans per month compared to 3.50 and 3.79rnquarter-over-quarter and year-over-year.</p

First mortgages accountedrnfor 99.43 percent of loan volume with only a tiny smattering of HELOCs, ReversernMortgages and other real estate loans.  Approximatelyrn34.25 percent of first mortgages were government guaranteed loans, a small droprnfrom 36.36 in the third quarter.  Onernyear earlier these FHA/VA/RHS loans accounted for 45.83 percent of firstrnmortgages.  The remaining first mortgagesrnwere conforming, with prime fixed mortgages making up 59.11 percent of therntotal (earlier figures were 56.82 percent and 47.30 percent.)  Respondents originated 99.27 percent of loansrnfor sale to others and 36.35 percent of loans were sold to the GSE, arnpercentage that has remained stable over the last year. </p

The average loan to valuernof loans originated in the four quarter was 77.37 percent compared to 78.76 percentrnand 81.85 percent in earlier quarters. rnThe average FICO score was 737, three points higher than last quarterrnand an 18 point improvement year-over-year. rnAbout 52 percent of loans were originated for borrowers with FICO scoresrnexceeding 750.</p

Refinancing represented 63rnpercent of originations during the quarter compared to 57 percent in the thirdrnquarter and 45 percent a year earlier. 40.34 percent of all loans were cash-outrnrefinancings, a substantial increase from the 25.58 percent one year ago.</p

The average pull-throughrn(the number of closings divided by the number of loan applications) rose to 74rnpercent in the fourth quarter from 68 percent in the third quarter of 2010.  The year-over-year change was slight, risingrnfrom 73.07 percent.</p

Total personnel expensernrose slightly to $3,124 per loan in the fourth quarter of 2010, compared torn$3,034 per loan in the third quarter of 2010.  In the fourth quarter 2009,rnpersonnel expenses averaged $2,756 per loan. rnThe average company had 165 full-time equivalent (FTE) production employees about half of whichrnwere classified as “sales” personnel</p

Net Financial Income in Q4 (expressedrnin Basis Points) was (136.23) compared to (135.47) and (121.73) in the previousrnperiods. Net Interest income was 2.41bps against 3.87rnand 6.26.   Net Secondary Marketing Income was 187.88bpsrncompared to 203.06 and 164.48, and Total Net Production Income was 54.07 (BP)rncompared to 71.46 and 49.01.</p

The “net cost to originate” increased to $2,827rnper loan from $2,720 in the previous quarter and $2,345 a year earlier. “Net cost to originate” includes all production operating expenses and commissions minus all feernincome, but excludes secondary marketing gains, capitalized servicing,rnservicing released premiums and warehouse interest spread</p

159 companies among the respondents service loans.  The average servicing portfolio totaled $7,027,082,000,rndown from $10,259,995,000 a year earlier. rnAverage loans serviced fell from 74,316 one year ago to 44,799 in thernrecent quarter.  Per loan income fromrnservicing was $233 per loan and Net Servicing Financial Income was $139; bothrnwere substantial improvements over the earlier periods.  In the third quarter income was $216 and Net Incomernwas ($41).  One year ago the figures werern$193 and $37.  The increase in net incomernmight be accounted for by personnel costs. Companies serviced an average of 955rnloans per FTE employee in the recent period, up from 849 last quarter and 787 arnyear earlier.

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