Low Volume and Competition Hurt Q4 Mortgage Profits

The balance sheet turned red again for mortgage lenders who reported financial data for the fourth quarter to the Mortgage Bankers Association (MBS).  On average the independent mortgage banks (IMBs) and mortgage subsidiaries of chartered banks surveyed for MBA's Quarterly Mortgage Bankers Performance Report reported a net loss of $200 per loan, down from a reported gain of $480 per loan in the third quarter of 2018.  It was the second quarterly loss in the last 12 months and only the third since MBA began collecting the data in 2008.

Marina Walsh, MBA's Vice President of Industry Analysis said, "Independent mortgage bankers continued to struggle in this very competitive mortgage market environment, with the average pre-tax net production income per loan reaching its lowest level since the inception of our report in 2008.  Among the headwinds for mortgage bankers were lower volume, lower revenues and higher costs relative to the previous quarter."

Added Walsh, "On the servicing side of the business, mortgage servicing right impairments resulting from December's drop in interest rates hurt profitability. Including all business lines (both production and servicing), only 44 percent of the firms in the study posted a pre-tax net financial profit in the fourth quarter."

Net production profits also turned negative in the first quarter of 2018.  Bankers reported to MBA that they had incurred a net loss of $118 on each loan they originated that quarter.  The results returned to profitability in the second and third quarters.

Average production volume was $440 million per company in the fourth quarter of 2018, down from $474 million the previous quarter and the average volume by loan count was 1,799 loans compared to 1,948.  MBA estimates that production volume was lower for the mortgage industry as a whole in the fourth than in the third quarter.

The average pre-tax production profits of 20 basis points (bps) in both the third quarter of 2018 and the fourth quarter of 2017 fell to an 11-bps loss in the most recent period.  Besides the loss in the first quarter of last year, mortgage bankers reported a loss only one other time, in the first quarter of 2014.

Total production revenue (fee income, net secondary marketing income and warehouse spread) decreased to 351 bps in the fourth quarter from 358 bps in the third quarter. On a per-loan basis, production revenues decreased to $8,411 per loan from $8,654 the prior quarter. Net secondary marketing income was 269 bps compared to 280 bps.  On a per-loan basis, net secondary marketing income decreased to $6,466 per loan from $6,802.

Total loan production expenses - commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations - was $8,611, up from $8,174 per loan in the third quarter. Over the duration of the MBS survey, which began in the third quarter of 2008, loan production expenses have averaged $6,367 per loan.

Personnel expenses rose from an average of $5,405 per loan to $5,636.  Productivity decreased to 1.8 loans originated per production employee per month in the fourth quarter from 1.9 loans in Q3.  Production employees include sales, fulfillment and production support functions.

Including all business lines (both production and servicing), 44 percent of the firms in the study posted pre-tax net financial profits in the fourth quarter, down from 71 percent in the third quarter.  

The purchase share of total originations by dollar volume decreased to 79 percent in the fourth quarter of 2018, from a study-high of 82 percent in the third quarter.  MBA estimates the purchase share was at 74 percent last quarter for the mortgage industry as a whole..

First mortgage loan balances averaged $253,689, a slight decrease from $255,539 in the third quarter. Lenders closed 75 percent of loans for which applications were received, unchanged from the previous quarter.

MBA received data from 343 companies.  Eighty percent were independent mortgage companies and 29 percent were subsidiaries and other non-depository institutions.