Mortgage bankers managed to make a marginal profit of $184 per loan on every loan they originated in the second half of 2008 despite lower net warehousing income and higher production operating expenses, according to the Mortgage Bankers Association (MBA). This modest profit marks an improvement over average per-loan losses in 2006 and 2007, according to the MBA's Annual Mortgage Bankers Performance Report.
"Many independent mortgage companies and bank subsidiaries made radical changes in their product offerings in order to remain alive in 2008," said Marina Walsh, MBA's Associate Vice President of Industry Analysis. "Among this group, the government share of total originations, mainly FHA loans, was 45 percent in the second half of 2008, compared to less than ten percent the year before. Small and mid-sized mortgage bankers were able to quickly respond to changing secondary market conditions as they had the flexibility to realign their business models toward FHA business and it was a key to their profitability."
Among the principal findings of the MBA report are:
► The average firm posted pre-tax net financial income of $0.7 million in 2008, compared to $0.9 million in 2007 and $6.4 million in 2006. Fifty-nine percent of the firms in the study posted pre-tax net financial profits. The remaining 41 percent, primarily firms with asset sizes less than $10 million, posted overall net financial losses.
► Mortgage banking production profits were 8.75 basis points, or $184 per loan. These profits were a modest improvement over the previous two years (2006-2007) in which net losses of around $50 and $560 were reported respectively. Many firms that were not profitable in production exited the market in 2007 and 2008, so the increase in profitability may be partly driven by having only the surviving firms in the survey.
► In 2007, loan origination and ancillary fees grew on a per-loan basis, but they did not keep pace with production operating expenses. However, in 2008, loan origination and ancillary fees continued to grow, and compensated for continued per-loan increases in production operating expenses. As a result, the "net cost to originate" fell to $2,291 per loan in 2008. The "net cost to originate" includes all origination operating expenses and commissions minus all fee income, but excludes secondary marketing gains, capitalized servicing, servicing released premiums and warehouse interest spread.
► The average pull-through rate (number of loan closings to number of loan applications) was 56.6 percent.
► Net warehousing income, which represents the net interest spread between the mortgage rate on a loan and the interest paid on a warehouse line of credit, dropped to $148 per loan in 2008 from $175 per loan in 2007. Likewise, the average days in warehouse dropped to 15 days from 20 days in 2007, partly because the reduced availability of warehouse lines caused lenders to move loans out as quickly as possible.
The change in product mix towards government loans helped improve net marketing income in 2008 because of the higher revenues associated with the government servicing assets. Net marketing income includes the gain or loss on the sale of loans in the secondary market, pricing subsidies and overages, as well as capitalized servicing and servicing released premiums.
Servicing financial profits per loan dropped to an average loss of $19 per loan (or 1.24 basis points) from a $109 per loan profit in 2007. Many servicers reported mortgage servicing right impairments in the fourth quarter 2008, as interest rates dropped and refinancings ramped up.
MBA's Annual Mortgage Bankers Performance Report replaces the former MBA Cost Study series. The report 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. Almost seventy-five percent of the 270 companies that reported production data for this report were independent companies. Overall, the average firm in the report originated about $500 million in 2008.
he underlying company data are derived from the quarterly Mortgage Bankers Financial Reporting "WebMB" Form. Through a joint agreement with the Mortgage Bankers Association, Fannie Mae, Freddie Mac and Ginnie Mae, the form and the definitions were recently revised. The revised form was used starting in the third quarter of 2008. As such, this year's Annual Mortgage Bankers Summary Performance Report is reflective of annualized data from the third and fourth quarters of 2008 only.
Moving forward, there will be five performance report publications per year: four quarterly reports and one annual report.
For more information, visit www.mortgagebankers.org.