Independent mortgage bankers’ per loan profits dropped to the lowest level in nearly three years during the fourth quarter as production costs rose to a new high, the Mortgage Bankers Association found.
At the same time, secondary market gain-on-sale margins continue to compress, putting the squeeze on lenders.
The per loan profit of $1,099 was less than half of the $2,594 earned in the third quarter and just 29% of the $3,738 net income for the fourth quarter of 2020.
"After a two-year run of above-average profitability, pretax net production income per loan reached its lowest level since the first quarter of 2019," Marina Walsh, the MBA's vice president of industry analysis, said in a press release. "Among the headwinds were lower revenues and higher production costs."
This took a toll on IMB profitability, allowing just 76% of the firms in the study to post pretax net financial profits from all business lines (both production and servicing) in the fourth quarter, versus 92% the prior quarter and 95% the previous year.
Average production volume was $1.13 billion per company in the fourth quarter, down from $1.17 billion per company in the prior quarter. By units, IMBs averaged 3,711 loans in the fourth quarter, down from 3,889 loans in the third quarter.
The average cost to originate rose for the sixth consecutive quarter, to $9,470 per loan, the highest since the MBA began tracking this data. In the third quarter, this averaged $9,140 per loan, while in the fourth quarter of 2020, it was $7,938.
Personnel expenses make up the largest portion of the cost to originate, and averaged $6,438 per loan in the fourth quarter, up from $6,185 in the previous fiscal period and $4,526 a year earlier.
Meanwhile, net secondary-marketing income continued to compress, falling to 275 basis points in the fourth quarter, from 310 in the third and 346 one year ago. On a dollar basis, mortgage lenders earned an average of $8,326 per loan in the fourth quarter compared with $9,300 in the third and $9,655 a year ago.
Including fee income and any spread earned while warehousing the loan prior to sale in the secondary market, lenders averaged $10,569 of per loan income in the fourth quarter, down from $11,734 during the prior three months and $11,676 in the year-ago period.
The one area where independent mortgage bankers benefited from higher interest rates was in their servicing segment.
Net financial income for servicing in the fourth quarter was $71 per loan, up from $37 in the third and $5 a year earlier. This calculation was not annualized, the MBA said.
At the same time, servicing operating income was $87 per loan in the fourth quarter, down slightly from $88 in the third quarter, but up from $50 one year ago. The MBA excludes certain financial information associated with mortgage servicing rights in this calculation, including amortization, any gains or loss in the valuation net of hedging, and gains or losses on bulk sales.
Servicing income could help mortgage bankers offset a decline in application activity since the start of the year. The MBA's Market Composite Index had fallen to a seasonally adjusted 495.6 as of the week of March 11th, compared with 572.8 for the week of Dec. 31, 2020.
"With revenue tightening and volume slowing, it is becoming increasingly important for companies to adjust costs as the lending landscape moves from a rate-term refinancing market to a purchase and cash-out refinancing market," Walsh said.
