Mortgage Bank Profits Back in Black

Mortgage banks substantially improved their bottom line numbers in the second quarter after posting a loss on every loan written during the first quarter of the year.  The Mortgage Bankers Association (MBA) said Independent mortgage banks and mortgage subsidiaries of chartered banks reported a net gain of $954 on each loan they originated in the second quarter, up from a reported loss of $194 per loan the quarter before.

"The gains seen in the second quarter come after first quarter losses that were likely triggered by a variety of  factors including the implementation of new Dodd-Frank regulations and extremely low origination volumes," said Marina Walsh, MBA's Vice President of Industry Analysis.  "Some loan closings may have been pushed into the second quarter, resulting in an increase in profitability as per-loan production costs declined."

Those total loan production expenses - commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations - decreased to $6,932 per loan in the second quarter of 2014, from $8,025 in the first quarter.  The $1,093 reduction was the largest in any single quarter since the inception of the MBA's Quarterly Mortgage Bankers Performance Report in the first quarter of 2008.

The current Performance Report says that the average production profit was 45.70 basis points in compared to an average net production loss of 8.31 basis points (bps) in the first quarter of the year. Despite the increase the second quarter, net production income is well below the average of 54.33 bps and the median of 52.05 bps published by the MBA's report across its publication history.

Production volume averaged $378 million per company in Q2 compared to $274 million in Q1, an increase of 38 percent.  The average volume by count rose to 1,676 loans from 1,238.

Purchase mortgages represented 74 percent of the dollar volume of all mortgages originated in the quarter compared to 68 percent the previous period.  MBA estimates that the purchase share for the mortgage industry as a whole was 59 percent in the second quarter, up from 51 percent in the first.

The jumbo share of total first mortgage originations continued to increase, rising to 7 percent in the second quarter, the highest level in the Report's history.  MBA'S Weekly Mortgage Applications Survey and its monthly credit availability data confirm a strong growth in jumbo origination volume. 

Secondary marketing income was 270 basis points in the second quarter, 7 bps lower than in the first quarter.

Personnel expenses averaged $4,423 per loan in the second quarter of 2014, down from $5,048 per loan in the first quarter.  This was primarily driven by a reduction in per loan fulfillment, support and benefit expenses.  Productivity was 2.30 loans originated per production employee per month in the second quarter of 2014, up from 1.70 in the first quarter.

The "net cost to originate" was $5,074 per loan, down from $6,253 in the first quarter.  The "net cost to originate" includes all production operating expenses and commissions, minus all fee income, but excluding secondary marketing gains, capitalized servicing, servicing released premiums, and warehouse interest spread.

Including all business lines, 81 percent of the firms in the study posted pre-tax net financial profits in the second quarter, up from the 54 percent which did so the previous quarter, but down from the 92 percent seen in the second quarter of 2013.

Seventy-three percent of the 349 companies that reported production data for the second quarter Production Report were independent mortgage companies and the remaining 27 percent were subsidiaries and other non-depository institutions.