Profit margins for independent mortgage banks (IMBs) and mortgage subsidiaries of chartered banks shrank dramatically in the fourth quarter of 2020 as costs climbed.
IMBs reported a net gain of $3,738 per each originated loan in the fourth quarter, down from $5,535 during the third quarter, according to the Mortgage Bankers Association‘s latest quarterly performance report.
“Driven by strong borrower demand and a study-high in average loan balances, production volume for independent mortgage companies reached unprecedented heights, averaging close to $1.5 billion per company in the fourth quarter of 2020,” said Marina Walsh, the MBA’s vice president of industry analysis. “Net production profits were at their third-highest levels, surpassed only by last year’s second and third quarter. While production profits were still incredibly strong in the fourth quarter, secondary marketing gains declined, resulting in an overall drop in production revenue.”
Walsh’s research found that production expenses increased for the second straight quarter, even though higher origination volume has historically reduced per-loan costs. Expenses rose by almost $500 per loan from the third quarter, as personnel costs increased across sales, fulfillment, production support, and corporate overhead, Walsh said.
In fact, total loan production expenses – commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations – increased to $7,938 per loan in the fourth quarter, up from $7,452 per loan in the third quarter. From the third quarter of 2008 to last quarter, loan production expenses have averaged $6,594 per loan.
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The MBA found that personnel expenses in particular averaged $5,426 per loan in the fourth quarter, up from $5,124 per loan in the third quarter. Productivity decreased to 4.2 loans originated per production employee (sales, fulfillment and production support staffers) per month in the fourth quarter from 4.3 loans per production employee per month in the third quarter.
Industry-wide, the average pre-tax production profit was 137 basis points in the fourth quarter, a drop of 66 bps from the prior quarter. Still, it was far better than 46 bps average from IMBs in the fourth quarter of 2019 and the historic average of 53 bps (from Q3 2008-Q3 2020).
Combining both production and servicing operations, 95 percent of firms posted overall profitability for the fourth quarter of 2020.
Average production volume was $1.47 billion per company in the fourth quarter, up from $1.34 billion per company in the prior quarter, the MBA found. The volume by count per company averaged 5,049 loans in the fourth quarter, up from 4,732 loans in the third quarter. The MBA also found that the average pull-through rate increased dramatically to 78% from 72% from the prior quarter.
Other key findings include:
- Total production revenue (fee income, net secondary marking income and warehouse spread) decreased to 421 bps in the fourth quarter, down from 475 bps in the third quarter. On a per-loan basis, production revenues decreased to $ 11,676 per loan in the fourth quarter, down from $12,987 per loan in the third quarter.
- Net secondary marketing income decreased to 346 bps in the fourth quarter, down from 394 bps in the third quarter. On a per-loan basis, net secondary marketing income decreased to $9,655 per loan in the fourth quarter from $10,883 per loan in the third quarter.
- The purchase share of total originations, by dollar volume, decreased to 43 percent in the fourth quarter from 46 percent in the third quarter. For the mortgage industry as a whole, MBA estimates the purchase share was at 36 percent in last year’s fourth quarter.
- The average loan balance for first mortgages increased to a new study high of $287,131 in the fourth quarter, up from $282,659 in the third quarter.
- Servicing net financial income for the fourth quarter (without annualizing) was at $5 per loan, compared to a loss of $30 per loan in the third quarter. Servicing operating income, which excludes MSR amortization, gains/loss in the valuation of servicing rights net of hedging gains/losses and gains/losses on the bulk sale of MSRs, was $50 per loan in the fourth quarter, up from $26 per loan in the third quarter.
- Including all business lines (both production and servicing), 95 percent of the firms in the study posted pre-tax net financial profits in the fourth quarter, down from 99 percent in the third quarter.
