Non-Agency, POS, Warehouse Products; STRATMOR on the Business Cycle; Production Costs

Sometimes it’s tough to find good news out there. For independent mortgage bank (IMB) and mortgage subsidiaries of chartered bank lenders, the MBA reports that production costs exceeded $11,000 per loan in the 3rd quarter leading to a net loss of $624 on each loan they originated. (More below.) And the cost of determining a borrower’s credit will be heading significantly higher, according to word on the street. The increases are not coming from credit resellers, such as credit reporting agencies, but rumored instead to be coming from the bureaus and Fair Isaac, customers are encouraged to speak with their credit source for the exact details on tiers, actual percentage increases, and timing to put speculation to rest. Want some good news? We’re a month away from the day with the least amount of sunlight (solstice). Want a free Denny’s breakfast for a year just by wearing this $5.99 T-shirt? In a fantastic marketing feat, there are only 150 of them and they go on sale at midnight on the 24th. How about this for opportunity: there’s almost $30 trillion in home equity out there. Go help some owners tap into theirs. (Today’s podcast is available here and this week’s is sponsored by Richey May, a recognized leader in providing specialized advisory, audit, tax, technology, and other services in the mortgage industry and in banking. Today’s has an interview with Rice Park’s Nick Smith on a wide range of current capital markets topics from TBA liquidity to what REITs do.)

Broker and Lender Services and Software

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Having the right team assembled is key to operating your business with peace of mind. The same can be said for your external business relationships. That’s why it makes sense to explore what the Fifth Third Bank, National Association team can do for you. They offer a broad range of liquidity, credit, and treasury solutions designed for mortgage bankers, all in one place. With over 150 years in business and $207B in assets, they bring financial strength, expertise and a strong commitment to the mortgage industry to the table. Contact Donnie Martin, David Ingram or Jeff Bonner to see how they can partner with you and contribute to your success.

STRATMOR on the Current Business Cycle

Every day around midnight I’m shocked to find out it is only 6PM.” Every year 48 states go through changing their clocks twice a year, with the same result. Have you ever experienced déjà vu, that sensation where you feel as if you have experienced that very moment before? In the just released November issue of STRATMOR Group’s Insights Report, Senior Partner Jim Cameron offers insight into why many lenders are not getting that sense of déjà vu with the current mortgage market down cycle. “This feels different,” is what many are saying, and they are right. According to Cameron, several aspects of this down cycle differentiate it from previous ones, including the speed and severity of the rate increases and the drop in mortgage volume, unit volume decrease (which matters most to operations), margin compression and more. There is some good news, too, and Cameron shares data in charts and graphs that illustrate the ups and downs in our current lending environment. Don’t miss Cameron’s article, “What’s Different About This Downturn?” in the November issue of STRATMOR’s Insights Report.

Production Costs Per Loan: $11,000

The MBA’s Quarterly Mortgage Bankers Performance Report contains meaningful performance measures and benchmarks on originations and servicing for independent mortgage bankers (IMBs). In the latest Q3 report, IMBs' average pre-tax net production income per loan reached its lowest level since the inception of MBA’s report in 2008.

Marina Walsh, CMB, MBA’s Vice President of Industry Analysis, notes, “The industry continues to struggle with a perfect storm of lower production volume and revenues and escalating production costs, which for the first time exceed $11,000 per loan. Companies are responding to tough market conditions by reducing excess capacity, including staff. The number of production employees per firm is down 7 percent from the previous quarter and 19 percent from one year ago. However, overall volume has dropped so swiftly that some companies are having difficulties adjusting staffing and other costs to match market conditions.”

Mortgage servicing continues to be the silver lining in the current rate environment. With prepayments and delinquencies low, mortgage servicing has been the difference for many companies between profitable or not. Roughly one in two companies generated a profit in the third quarter; but without mortgage servicing operations, only one in four companies would have been profitable.

The average pre-tax production loss was 20 basis points (bps) in the third quarter of 2022, down from an average net production loss of 5 bps in the second quarter of 2022, and down from a gain of 89 basis points one year ago. Total production revenue (fee income, net secondary marketing income and warehouse spread) decreased to 326 bps in the third quarter, down from 335 bps in the second quarter. On a per-loan basis, production revenues decreased to $10,392 per loan in the third quarter, down from $10,855 per loan in the second quarter.

Net secondary marketing income decreased to 223 bps in the third quarter, down from 243 bps in the second quarter. On a per-loan basis, net secondary marketing income decreased to $7,165 per loan in the third quarter from $7,939 per loan in the second quarter. The average pull-through rate (loan closings to applications) increased to 77 percent in the third quarter, up from 75 percent in the second quarter.

Total loan production expenses (commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations) increased to a study high of $11,016 per loan in the third quarter, up from $10,937 per loan in the second quarter of 2022. Personnel expenses averaged $7,325 per loan in the third quarter. Productivity decreased to 1.5 loans originated per production employee per month in the third quarter from 1.7 loans per production employee per month in the second quarter. (Production employees include sales, fulfillment, and production support functions.)

Servicing net financial income for the third quarter (without annualizing) was at $102 per loan, down from $133 per loan in the second 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 $95 per loan in the third quarter, down from $97 per loan in the second quarter.

Capital Markets

What did we learn last week? Mortgage rates in the U.S. faced the biggest weekly decline in nearly 41 years, providing some relief after a rapid run-up that quickly priced out homebuyers. The average rate for a 30-year fixed mortgage was 6.61 percent, the lowest in almost two months. We also learned that existing home sales fell for the ninth month in a row, according to the National Association of Realtors. Home sales fell 5.9 percent month-over-month to a seasonally-adjusted annual rate of 4.43 million, down 28.4 percent from a year ago. Blame high prices and high mortgage rates, which are negatively affecting affordability.

Retail sales increased 1.3 percent in October, above analysts’ expectations for a 0.9 percent increase. Core retail sales increased by 0.7 percent which was also above market consensus. Producer prices increased by 0.2 percent which is the same monthly increase observed in September but it was below expectations for a 0.5 percent increase. Year-over-year prices increased by 8.0 percent, the fourth consecutive month where the annual growth rate decreased from the previous month. Industrial production contracted by 0.1 percent as mining and utilities output fell during the month. Housing starts fell 4.2 percent in October to an annualized rate of 1.425 million but remained above the average rate over the last 10 years of 1.206 million units. The long-run average over the entire data series dating back to 1959 is 1.434 million units. A clear shift in inflation expectations as well as a slowdown in the pace of interest rate increases next month could signal we are near the peak in rates and provide some stability in housing demand.

This week ahead is anticipated to see reduced market volume as it is Thanksgiving Day on Thursday followed by an early close on Friday with many participants likely taking the full week off. The economic calendar is full of month-end Treasury supply, including an auction of $42 billion 2-year notes and $43 billion 5-year notes today. As for economic releases, today there is just the October Chicago Fed National Activity Index. Tomorrow brings Philly Fed non-manufacturing, S&P PMI November flashes, and Richmond Fed manufacturing and services indexes, while on Wednesday are durable goods, consumer sentiment, and new home sales. We begin the week with Agency MBS prices nearly unchanged from Friday and the 10-year yielding 3.81 after closing last week at 3.82 percent.

Jobs, M&A

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“Equity Resources is very excited to continue our growth into 2023! We are a privately owned mortgage bank with headquarters in central Ohio and several branch offices throughout our 19-state footprint along the east coast, southeast, and through the Midwest. 2023 will mark our 30th anniversary! Our valued team members, our commitment to our team, our clients, and the communities that we serve will ensure we continue to celebrate anniversary milestones through the years! It is vital to partner with a mortgage company that embraces the growth of Loan Officers, supports their vision, offers one-on-one business planning, and that has the financial strength to not only weather any storm but to thrive in any market through proven business and marketing strategies. This is why we have such enviable tenure with our Loan Officer team: LOs within Equity are celebrating their 7th, 10th, 15th, 20th, etc. anniversaries! To learn more about our LO opportunities, as well as our innovative LEAD program (Loan Officer Education and Development), please contact Tom Piecenski, EVP of Sales and Development (614.327.5353).”

“Lots of talk recently about IMB consolidations and shrinking scale. Volume will be $2 trillion or less in 2023. Capacity will continue to right size to 2023 volume. How will we get there? A combination of failures, consolidations, and a shrinking footprint for every company. Some think 40% of IMBs will have to go away. That seems excessive to me, but no doubt a consolidation is underway. Company owners can stay the course and hope for better times. Or they can de-risk and look for a partner. Hard to say how long this down market will continue, and this is the challenge. Lots of talk this week about the terminal rate going significantly higher than the market is projecting and then staying elevated for a long time. Personally, I’m not in that camp, but this is the big risk for IMBs. Each company situation requires a different solution. If you would be interested in looking at options, please contact James Johnson (707-738-2666).”