Slow Refinance Market Eats at Mortgage Banker Profits

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

Marina Walsh, MBA’srnAssociate Vice President of Industry Analysis said that a significant drop inrnvolume during the first quarter was due largely to a fall-off inrnrefinancing.  This made it difficult forrnmortgage companies to manage staff levels which in turn caused higherrnproduction costs.  Walsh continued, “In the first quarter of 2011, changes inrncompensation plans and investor expectations are additional factors that likelyrndrove up loan production expenses per loan to the highest levels ever reportedrnfor this study.”</p

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

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

Average production volume wasrn$164 million per company, down from $286 million in the fourth quarter and thernaverage number of loans originated was down from 1,296 to 793.  The loss of business came mainly from thernrefinancing share which dropped from 60.13 percent of volume in the fourthrnquarter to 48.23 percent and in the share of the dollar volume from 63 percentrnto 50 percent.  The size of the averagernloan fell to $196,456 in the first quarter from $208,319.  Loan closings per production employee wererndown from 3.79 per month to 2.25.</p

NetrnSecondary Marketing Income rose to 200.78 basis points to 187.88 bp, butrnbecause of the decreasing average loan balance the net secondary marketingrnincome was down slightly from $3,870 per loan to $3,827.    Full-year 2010 productionrnprofits were $1,054 per loan originated. In comparison, average productionrnprofits in 2009 were $1,135 per loan originated and $305 per loan originated inrn2008.</p

The government share of loansrnoriginated by survey respondents rose from 34.5 percent in the fourth quarter of 2010 to 37.9rnpercent in the first quarter of 2011.  Prime conforming fixed-raternloan production decreased from 58.9 percent to 53.71 of the total while prime conforming ARMs gainedrn96 basis points in market share to 2.95 percent.  Thernpercentage of ARM loans overall was also up from 3.73 percent of all lending torn4.98 percent.</p

Just less than 9 percent ofrnloans were written for borrowers having FICO scores below 650 points while 46rnpercent were to borrowers with scores over 750. rn47 percent of loans were written with an LTV above 80 percent comparedrnto 42.6 percent in the fourth quarter of 2010. rnLenders originated 99.15 percent of their loans for sale to others;rn37.11 percent were sold to Fannie Mae, Freddie Mac, or Ginnie Mae.</p

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

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