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MBA study: A narrowing in profit margins for independent mortgage bankers

Dec 17, 2009

Independent mortgage bankers and subsidiaries made an average profit of $902 on each loan they originated in the third quarter of 2009, according to a study by the Mortgage Bankers Association (MBA). This profit marks a decrease from the second quarter of 2009 when profits averaged $1,358 per loan, according to the MBA's most recent Quarterly Mortgage Bankers Performance Report. This report measures the performance of independent mortgage bankers and subsidiaries of banks, thrifts and hedge funds. "Production profits were still healthy in the third quarter of 2009, although not at the same level that we saw in the second quarter," said Marina Walsh, MBA's associate vice president of industry analysis. "For lenders in our study, average production volume dropped 33 percent in the third quarter 2009, along with a drop in the refinancing share of total originations. The overall decline in production volume combined with a heavier purchase share resulted in higher per-loan production expenses, which pulled down production profits." Among the principal findings of the MBA report are: ► 82 percent of the firms in the study posted pre-tax net financial profits in the third quarter 2009. In the second quarter 2009, 96 percent of the companies posted profits. ► The average production volume for each firm was $189.6 million in the third quarter 2009, compared to $280.9 million in the second quarter 2009. ► The share of refinancings to total originations for this sample dropped to 44 percent in the third quarter 2009, from 62 percent in the second quarter 2009. This share was still higher than the 32 percent for the third quarter 2008. ► Average pull-through (the number of closings divided by the number of loan applications) was relatively constant at 72 percent in the third quarter 2009 from 73 percent in the second quarter 2009. ► Mortgage banking production profits were 50.03 basis points, or $902 per loan. These profits declined over the previous quarter when profits averaged 71.29 basis points, or $1,358 per loan. The "net cost to originate" rose to $1,950 per loan in the third quarter 2009, from $1,295 per loan in the second quarter 2009. 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. ► Production operating expenses--commissions, compensation, occupancy and equipment, and other production expenses and corporate allocations--rose to $4,376 per loan in the third quarter 2009 compared to $3,581 per loan in the second quarter 2009. ► For firms specifically in the retail channel, closings per sales employee per month averaged 6.7 closings in the third quarter, from 11.0 closings in the second quarter. Net production income dropped to 54 basis points in the third quarter from 73 basis points in the second quarter. ► 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, rose slightly to 6.67 basis points in the third quarter 2009, compared to 5.19 basis points in the second quarter of 2009.  ► Net servicing income of these independent mortgage companies and subsidiaries was unchanged at $41 per loan serviced in the third quarter 2009. MBA's Quarterly 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. Seventy-three percent of the 306 companies that reported production data for this report were independent mortgage banking companies. For more information, visit www.mortgagebankers.org.      
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