Do You Need More Profits?

Recently the Mortgage Bankers Association (MBA) delivered some sobering news. Independent mortgage banks and mortgage subsidiaries of chartered banks made an average profit of $150 on each loan they originated in the fourth quarter of 2013, down from $743 per loan in the third quarter, the MBA reported in its Quarterly Mortgage Bankers Performance Report.

“Fourth-quarter production profits were at their lowest levels since inception of the Performance Report in 2008, driven by study-high costs in a declining mortgage market,” said Marina Walsh, MBA’s Vice President of Industry Analysis.  “One consolation was in mortgage servicing, where financial income improved.  However, not all mortgage companies retained mortgage servicing rights or generated margins large enough to offset production losses.  It is perhaps not surprising that only 58 percent of participating companies had overall positive pre-tax profits in the quarter.”

Among the other key findings of MBA’s Quarterly Mortgage Bankers Performance Report are: In basis points, the average production profit (net production income) was 9 basis points in the fourth quarter of 2013, compared to 38 basis points in the third quarter.  This marks the fifth consecutive quarter that production profits have decreased.

Average production volume was $367 million per company in the fourth quarter of 2013, down from $391 million per company in the third quarter.  The volume by count per company averaged 1,641 loans in the fourth quarter, down from 1,788 in the third quarter.

The purchase share of total originations, by dollar volume, increased to 69 percent in the fourth quarter of 2013, up from 67 percent in the third quarter.  For the mortgage industry as whole, MBA estimates the purchase share at 47 percent in the fourth quarter of 2013, down from 49 percent in the third quarter.

Secondary marketing income increased to 248 basis points in the fourth quarter, compared to 244 basis points in the third quarter. Total loan production expenses – commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations – increased to $6,959 per loan in the fourth quarter, up from $6,368 in the third quarter.  Fourth quarter 2013 production expenses were the highest recorded in any quarter since the Performance Report was created in the third quarter of 2008.

Personnel expenses averaged $4,385 per loan in the fourth quarter, up from $4,130 per loan in the third quarter.? The “net cost to originate” was $5,171 per loan in the fourth quarter, up from $4,573 in the third quarter.  The “net cost to originate” includes all production operating expenses and commissions, minus all fee income, but excluding secondary marketing gains, capitalized servicing, servicing released premiums, and warehouse interest spread.

Productivity was 2.0 loans originated per production employee per month in the fourth quarter, down from 2.5 in the third quarter. For those companies in mortgage servicing, net servicing income per loan increased to $355 per loan in the fourth quarter from $224 per loan in the third quarter.  In basis points, the average servicing profit was 19 basis points in the fourth quarter of 2013, compared to 12 basis points in the third quarter. Including all business lines, 58 percent of the firms in the study posted pre-tax net financial profits in the fourth quarter of 2013, down from 74 percent in third quarter, and 92 percent in second quarter.

So, how do you become more profitable in a market with declining origination where the cost to originate is increasing? The only answer is to streamline and automate more processes. The technology exists today to automate virtually every part of the mortgage process, which would shorten the time to process a loan, eliminate a lot of fraud and human error, ensure compliance and cut costs. So, why don’t lenders automate more? I guess they feel like they don’t need more profit, what other reason could there be?

About The Author

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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.