Evolving Mortgage Market Helps Lenders Profit

According to the Mortgage Bankers Association’s (MBA) Annual Mortgage Bankers Performance Report (formerly the MBA Cost Study series) the average loan written in the second half of 2008 brought in a modest profit of $184 or 8.75 basis points compared to net losses of $50 in 2006 and $560 in 2007. This was in spite of lower net warehousing income and higher production operating expenses.  MBA pointed out that the many firms that left the market in the past two years may have driven an increase in profitability for the survivors.

The average firm posted a pre-tax net income of $0.7 million in 2008 compared to $0.9 million and $6.4 million in 2007 and 2006 respectively.  Larger firms fared much better than smaller ones, 41 percent of all companies posted overall net financial losses and most of those were firms with less than $10 million in assets.  

An MBA spokesperson said that many independent mortgage companies and bank subsidiaries made radical changes in their product offerings including an increase in writing FHA loans, a category which increased to 45 percent of loans in 2008 from 10 percent the year before.  Marina Walsh, Associate Vice President of Industry Analysis said “Small and mid-sized mortgage bankers were able to quickly respond to changing secondary market conditions as they had the flexibility to realign their business models toward FHA business and it was a key to their profitability.”

This change in product mix helped improve marketing income because of the higher revenues associating with servicing government assets.  Net marketing income includes the gain or loss on the sale of loans in the secondary market, pricing subsidies, and overages as well as capitalized servicing and servicing released premiums.

In 2007 loan origination and other fees grew on a per-loan basis but not enough to keep pace with production expenses.  Last year those fees continued to increase and compensated for continued production expenses.  As a result the “net cost to originate” fell to $2,291 per loan last year.

Net warehousing income – the difference between the mortgage rate on the loan and the interest paid on the warehouse line of credit – dropped to $148 per loan in 2008, $27 less than a year earlier.  At the same time the reduced availability of credit caused lenders to move loans out of the warehouse in 15 days as compared to 20 days in 2007.

Lenders reported that they closed an average of 56.6 percent of all loan applications

The report was based on data collected from the quarterly Mortgage Bankers Financial Reporting Form.  270 firms responded to the survey, 75 percent of which were independent companies.  The average firm in the report originated about $500 million in loans in 2008.