Are Lenders Wasting Money?

*Are Lenders Wasting Money?*
**By Tony Garritano**

TonyG***I’ve been saying for years now that technology makes a clear difference. Here’s the proof: independent mortgage banks and mortgage subsidiaries of chartered banks made an average profit of $2,256 on each loan they originated in the fourth quarter of 2012, down from $2,465 per loan in the third quarter, as increasing costs outweighed higher revenues, the Mortgage Bankers Association (MBA) reported today. Here’s why this is happening:

****“Per-loan profits decreased in the fourth quarter, primarily driven by rising costs,” said MBA Associate Vice President of Industry Analysis Marina Walsh. “Historically, production costs have dropped with rising volume. In this quarter, however, despite high origination volumes, per-loan costs reached the highest levels we have seen in this study, other than during the first half of 2011, when origination volume was 60 percent lower.”

****Among the other key findings of MBA’s Quarterly Mortgage Bankers Performance Report are:

****The average production profit (net production income) was 107 basis points in the fourth quarter, compared to 120 basis points in the third quarter.

****Average production volume was $488 million per company in the fourth quarter, up from $450 million per company in the third quarter. The average volume by count per company rose to 2,132 loans in the fourth quarter, up from 2,010 in the third quarter.

****The refinancing share of total originations, by dollar volume, was 61 percent in the fourth quarter, up from 57 percent in the third quarter. For the mortgage industry as whole, MBA estimates the refinancing share at 75 percent in the fourth quarter of 2012, up from 73 percent in the third quarter.

****Secondary marketing income improved to 279 basis points in the fourth quarter, compared to 271 basis points in the third quarter.

****Total loan production expenses – commissions, compensation, occupancy and equipment, and other production expenses and corporate allocations – increased to $5,603 per loan in the fourth quarter, from $5,163 in the third quarter.

****Personnel expenses averaged $3,570 per loan in the fourth quarter, up from $3,320 per loan in the third quarter, with the largest increase being for fulfillment personnel expense, which rose to $858 per loan in the fourth quarter, from $739 per loan in the third quarter.

****The “net cost to originate” was $3,813 in the fourth quarter, from $3,353 per loan in the third quarter. The “net cost to originate” includes all production operating expenses and commissions minus all fee income, but excludes secondary marketing gains, capitalized servicing, servicing released premiums and warehouse interest spread.

****Productivity was 3.8 loans originated per production employee per month in the fourth quarter, down from 3.9 in the third quarter. Fulfillment productivity was 10.2 loans originated per fulfillment employee per month in the fourth quarter, down from 10.9 in the third quarter.

****94 percent of the firms in the study posted pre-tax net financial profits in the fourth quarter of 2012, compared to 97 percent in the third quarter.

****MBA’s Mortgage Bankers Performance Report series offers a variety of performance measures on the mortgage banking industry and is intended as a financial and operational benchmark for independent mortgage companies, bank subsidiaries and other non-depository institutions. 72 percent of the 311 companies that reported production data for the fourth quarter report were independent mortgage companies.

****What does this mean? Despite an increase origination volume in the fourth quarter, profit still decreased. Why? Personnel expenses went up and so did the cost to originate. If this isn’t a signal to lenders that you can’t solve problems and make a profit by simply adding more people, I don’t know what is. The bottom line is that lenders have to think about using technology to gain efficiency and maintain compliance or else their profits will suffer.

Tony Garritano
Tony Garritano is chairman and founder at PROGRESS in Lending Association. As a speaker Tony has worked hard to inform executives about how technology should be a tool used to further business objectives. For over 10 years he has worked as a journalist, researcher and speaker in the mortgage technology space. Starting this association was the next step for someone like Tony, who has dedicated his career to providing mortgage executives with the information needed to make informed technology decisions. He can be reached via e-mail at tony@progressinlending.com.