Could the End of the Refi Years Mean a Bottom for Loan Profits?
Independent mortgage banks and subsidiaries made an average profit of $1,082 on each loan they originated in the fourth quarter of 2010, down from $1,423 per loan in the third quarter of 2010, according to the Mortgage Bankers Association's (MBA) 4th Quarter 2010 Mortgage Bankers Performance Report. This decline was driven by lower net secondary marketing income that decreased to $3,870 per loan (188 basis points) in the fourth quarter 2010, from $4,069 per loan (203 basis points) in the third quarter 2010. Over 70 percent of the 310 companies reporting production data for this report were independent mortgage companies.
"Rising interest rates during the fourth quarter, particularly in the month of December, had an adverse impact on net gain on sale for many independent mortgage bankers" said Marina Walsh, associate VP of industry analysis for the Mortgage Bankers Association (MBA).
According to MBA's Mortgage Finance Forecast released earlier this week, in 2010, refinances were at 70 percent. Since 1990, the average rate of refis annually stood only at 44 percent. The purchase market is forecasted as rising from $473 billion in 2010, to $558 billion in 2011, and experiencing a nearly 70 percent two-year rise to $730 billion in 2012.
Among the additional key findings of MBA's Quarterly Mortgage Bankers Performance Report are:
►The refinance share of total originations ($) for this sample of independent mortgage bankers and subsidiaries rose to 63 percent in the fourth quarter 2010, compared to 57 percent in the third quarter 2010 and 45 percent in the fourth quarter 2009.
►The average pull-through (the number of closings divided by the number of loan applications) rose to 74 percent from 68 percent in the third quarter of 2010.
►The "net cost to originate" increased to $2,827 per loan in the fourth quarter of 2010, from $2,720 per loan in the third quarter of 2010. 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.
►Total personnel expense rose slightly to $3,124 per loan in the fourth quarter of 2010, compared to $3,034 per loan in the third quarter of 2010. In the fourth quarter 2009, personnel expenses averaged $2,756 per loan.
►84 percent of the firms in the study posted pre-tax net financial profits in the fourth quarter of 2010, compared to 88 percent in the third quarter of 2010 and 76 percent in the fourth quarter of 2009.
"During the month of December, the average 30-year fixed mortgage rate was 4.82 percent, about 37 basis points higher than in November and 55 basis points higher than in October," said Walsh. "Considering such variables as the timing of rate locks, pull-through expectations, and hedging effectiveness, some mortgage bankers' earnings were hurt by the rapid change in rate environment in the fourth quarter."With the favorable third-quarter refinancing rally after an inauspicious start in the first quarter 2010, full-year 2010 production profits will be lower than 2009 but probably within $200 per loan of 2009 levels. In comparison, average production profits in 2009 were $1,135 per loan originated. Average production profits in 2008 were $305 per loan originated. MBA will release its annual summary report for 2010 by early June.
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