Loan Profits Plummet with Declining Volume, Increased Compliance Cost

Mortgage profits took a big hit in the third quarter of 2013, dropping by more than half of that reported in the second quarter.  The Mortgage Bankers Association (MBA) said independent mortgage banks and mortgage subsidiaries of chartered banks reported an average of $743 per loan profit in the third quarter compared to $1,528 for each loan originated in the second quarter.  The average production income fell from 75 basis points to 38, marking the fourth consecutive quarter that productions profits have declined.  

"Third-quarter profits were reduced by half because of several factors: per-loan production expenses that reached study-highs, declining production volume and reduced secondary marketing income," said Marina Walsh, MBA's Associate Vice President of Industry Analysis.  "Historically, mortgage bankers have struggled to control fixed costs and right-size in a declining market, and the increasing costs of compliance and quality control only exacerbate an already difficult situation."

Secondary marketing income declined to 244 basis points in the third quarter, compared to 263 basis points in the second quarter.

Companies reported an average production volume of $391 million per company compared to $439 million in the second quarter as loan volume fell from an average of 1,921 loans to 1,788. As volume decreased total loan production expenses including commissions, compensation, occupancy, equipment and corporate allocations increased to $6,368 per loan from $5,818 in the second quarter.  Third quarter 2013 production expenses were the highest recorded in any quarter since the MBA's Quarterly Mortgage Bankers Performance Report began in the third quarter of 2008.

The "net cost to originate" was $4,573 per loan in the third quarter, up from $4,207 in the second 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.

Firms had an average of 259 production employees compared to 261 in the second quarter.  Among those companies reporting in both quarters the average dropped from 269 to 259.   Productivity fell from 2.9 loans per employee per month to 2.5 loans.   Personnel expenses averaged $4,130 per loan in the third quarter against $3,808 in the second.

The purchase share of total originations, by dollar volume, increased to 67 percent in the third quarter of 2013, up from 52 percent in the second quarter.  For the mortgage industry as whole, MBA estimates the purchase share at 49 percent in the third quarter of 2013, up from 34 percent in the second quarter.

MBA said that 324 companies responded to its third quarter survey, 74 percent of which were independent mortgage companies.