Refinancing Boom Boosts Lender Loan Profitability

Heightened levels of refinancing continued in April, May, and June and led to an increase in per-loan profits for independent mortgage bankers and subsidiaries according to a study released on Monday by the Mortgage Bankers Association (MBA).

The average production profits on each loan written during the second quarter of 2009 was $1,358 (71.29 basis points), a substantial gain over the average of $1,088 (54.58 basis points) per loan during the first quarter of the year.

The gain came as a big increase in production volume allowed lenders to spread their fixed costs over a larger number of loans, thus increasing net profits according to a statement released by Marina Walsh, MBA's Associate Vice President of Industry Analysis. 

The "net cost to originate" fell to $1,295 per loan in the second quarter 2009 from $1,725 per loan in the first quarter.  The "net cost to originate" includes all production operating expenses and commissions minus all fee income, but excludes secondary marketing gains, capitalized servicing, servicing released premiums and warehouse interest spread.

The Quarterly Mortgage Bankers Performance Report measures the performance of independent mortgage bankers and subsidiaries of banks, thrifts, and hedge funds.  The new report contains data showing that the average production volume for each firm studied was $280.9 million during the second quarter compared to $213.9 million in the first quarter and $125.6 million in the last quarter of 2008.  Of 292 respondents included in the study, 73 percent were independent companies.

The firms' pre-tax profits also increased according to the study.   96 percent of those reporting posted pre-tax net financial profits in the second quarter compared to 85 percent in the first quarter.  This is a major improvement over the fourth quarter of 2008 when only 53 percent of the companies reported they were profitable.  

While the percent of loans represented by refinancing decreased slightly from that reported in the first quarter - 62 percent as compared to 66 percent - the refinancing share was significantly higher than the 42 percent share at the end of last year.

Firms reported that they closed loans for an average of 73 percent applications they received, up from 67 percent in the first quarter. 

The second quarter production profits for mortgage firms that were primarily in the wholesale channels showed the most dramatic improvement, rising 46 percent to 61 basis points ($1,213 per loan) from 42 basis points ($803 per loan) in the first quarter 2009.

Other points of interest in the report included:

• Simple average borrower FICO scores for loan originations were 721 in the second quarter 2009, compared to 714 in the first quarter 2009.
• Production operating expenses, including commissions, compensation, occupancy and equipment, and other production expenses and corporate allocations, dropped to $3,581 per loan in the second quarter 2009 compared to $3,738 per loan in the first quarter 2009.
• The average number of retail loans originated per retail sales employee rose to 11.0 loans per month in the second quarter 2009, from 10.4 loans per month in the first quarter 2009.
• Net warehousing income, which represents the net interest spread between the mortgage rate on a loan and the interest paid on a warehouse line of credit, continued to pose a challenge for the mortgage bankers in this study. Interest spread dropped to 5.19 basis points in the second quarter 2009, compared to 6.60 basis points in the first quarter 2009 and 9.28 basis points in the fourth quarter 2008.
• Net servicing income of these independent mortgage companies and subsidiaries improved to $41 per loan serviced in the second quarter 2009, from net financial losses of $1 per loan serviced in the first quarter 2009. Quarter-by-quarter net operating servicing income (servicing fees, net escrow earnings and ancillary income less direct and indirect expenses) showed no change at $165 per loan.