Mortgage Banker Profits Drop More than a Third
The profits of independent mortgage banks and bank mortgage subsidiaries took their third straight tumble in the second quarter of this year. Those profits, however, were still stronger than historic averages.
The Mortgage Bankers Association (MBA) said, in its Quarterly Mortgage Bankers Performance Report, that banks had a net gain of $2,023 on each loan they originated during the period, down from a reported gain of $3,361 in Q1. (All comparisons that follow are to the first quarter of 2021 unless otherwise notes.)
The average pre-tax production profit was 73 basis points (bps), down from 124 bps in the previous quarter and 167 bps lower on a year-over-year basis. This is still higher, however, than the average in records that extend from the third quarter of 2008 to the most recent quarter, 55 bps.
"Net production profits dropped to the lowest level since the first quarter of 2019, but still remained above their historic quarterly average," said Marina Walsh, CMB, MBA's Vice President of Industry Analysis. "Competition stiffened, production volume declined, and the market began to shift towards more purchase activity and less refinances. The result for mortgage lenders was a combination of lower revenues and higher expenses."
Total production revenue (fee income, net secondary marking income and warehouse spread) decreased to 375 bps in the second quarter, down from 408 bps. On a per-loan basis, production revenues decreased to $10,691 per loan from $11,325 in Q1. Loan production expenses, which include commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations - increased to $8,668 per loan from $7,964 per loan and were well above the 2008 to current quarter average of $6,660 per loan. Personnel expenses increased from an average of $5,523 to $5,911 per loan.
Walsh noted, "Production revenues have declined for three straight quarters, and per-loan production expenses have increased for four straight quarters. This is a strong indication that the industry is moving away from the record-high profits of 2020."
Both the dollar volume and the production count were down from the previous quarter. Volume averaged $1.35 billion on a loan count of 4,615. In the prior period the volume was $1.44 billion from 4,879 loans.
Net secondary marketing income decreased to 297 bps from 331 bps. This was $8,500 compared to $9,283 per loan.
Productivity increased to 3.7 loans originated per production employee per month from 3.6 loans per production employee per month. Production employees includes sales, fulfillment, and production support functions. The average pull-through rate (loan closings to applications) was unchanged at 76 percent. The average loan balance for first mortgages increased to a new study high of $297,816 compared to $288,551 in the earlier period.
The purchase share of total originations, by dollar volume, increased to 57 percent from 39 percent. For the mortgage industry as a whole, MBA estimates the purchase share was at 44 percent in this year's second quarter.
Servicing net financial income for the second quarter (without annualizing) was at $7 per loan, down from $154. 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 $71, up from $65 per loan in Q1.
Walsh also noted that there was a decline in servicing profitability, resulting from mortgage servicing right (MSR) markdowns and increased operating expenses. Combining both production and servicing operations, 85 percent of firms posted overall profitability for the second quarter of 2021, compared to 97 percent in the first quarter.
Eighty-three percent of the 361 companies that reported production data for the second quarter of 2021 were independent mortgage companies, and the remaining 17 percent were subsidiaries and other non-depository institutions.