Independent Mortgage Bank Loan Losses Increase Almost Eight-Fold

The loan losses continue to grow for independent mortgage banks (IMBs). The Mortgage Bankers Association (MBA) is out with new numbers showing IMBs reported a net loss of $624 on each loan they originated in the third quarter of 2022; that’s compared with $82 per loan in the second quarter of 2022.

There have been only four quarters since records were first kept in 2008 that reflected average net basis point losses, the MBA reported. On a per-loan basis, production revenues decreased to $10,392 per loan in the third quarter, down from $10,855 per loan in the second quarter.

Servicing net financial income for the third quarter (without annualizing) was at $102 per loan, down from $133 per loan in the second quarter. Servicing operating income, which excludes MSR amortization, gains/loss in the valuation of servicing rights net of hedging gains/losses and gains/losses on the bulk sale of MSRs, was $95 per loan in the third quarter, down from $97 per loan in the second quarter.

Marina Walsh, CMB, MBA’s vice president of industry analysis, called the net loss numbers “sobering.” She added, “The industry continues to struggle with a perfect storm of lower production volume and revenues and escalating production costs, which for the first time exceed $11,000 per loan.”

Brett Ludden, managing director - financial services for Sterling Point Advisors, said those numbers aren’t surprising. “Losses are probably going to be even worse in the fourth quarter of 2022 and the first quarter of 2023.”

“The average pre-tax net production income per loan reached its lowest level since the inception of MBA’s report in 2008, which is sobering news given that the third quarter is historically the strongest quarter of the year,” said Walsh.

She added, “Companies are responding to tough market conditions by reducing excess capacity, including staff. The number of production employees per firm is down 7 percent from the previous quarter and 19 percent from one year ago. However, overall volume has dropped so swiftly that some companies are having difficulties adjusting staffing and other costs to match market conditions.”

Ludden said his firm is actively advising five IMBs currently and more have inquired about the merger and acquisition landscape. He said owners don’t want to lose the massive capital they built up through 2020 and 2021. That capital is helping the more successful IMBs weather the current downturn but they don’t want to “give away” all of that capital, which is why they are seeking partners.

Walsh noted that mortgage servicing continues to be the silver lining in the current rate environment. With prepayments and delinquencies low, mortgage servicing has been the difference for many companies between profitable or not. Roughly one in two companies generated a profit in the third quarter, but without mortgage servicing operations, only one in four companies would have been profitable. 

Walsh concluded, “October’s report on slower inflation and the subsequent drop in mortgage rates could resuscitate purchase demand and ultimately provide some needed relief for the industry.”

Key 3Q 2022 performance report findings include:

• The average pre-tax production loss was 20 basis points (bps) in the third quarter of 2022, down from an average net production loss of 5 bps in the second quarter of 2022, and down from a gain of 89 basis points one year ago. 
• The only other quarters in the survey's history to record net production losses were: first quarter of 2014 (8 basis points), first quarter of 2018 (8 basis points), fourth quarter of 2018 (11 basis points); and the second quarter of 2022 (5 basis points). The average quarterly pre-tax production profit, from the third quarter of 2008 to the most recent quarter, is 52 basis points.
• Average production volume was $578 million per company in the third quarter, down from $705 million in the second quarter. 
• The volume by count per company averaged 1,819 loans in the third quarter, down from 2,139 loans in the second quarter.
• Total production revenue (fee income, net secondary marketing income and warehouse spread) decreased to 326 bps in the third quarter, down from 335 bps in the second quarter. 
• Net secondary marketing income decreased to 223 bps in the third quarter, down from 243 bps in the second quarter. On a per-loan basis, net secondary marketing income decreased to $7,165 per loan in the third quarter from $7,939 per loan in the second quarter.
• The purchase share of total originations, by dollar volume, increased to a study high of 86% in the third quarter from 81% in the second quarter. For the mortgage industry as a whole, MBA estimates the purchase share was at 81% in the third quarter of 2022.
• The average loan balance for first mortgages decreased to $335,940 in the third quarter, down from $337,130 in the second quarter.
• Total loan production expenses – commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations – increased to a study high of $11,016 per loan in the third quarter, up from $10,937 in the second quarter of 2022.
• Personnel expenses averaged $7,325 per loan in the third quarter, down from $7,371 per loan in the second quarter.
• Productivity decreased to 1.5 loans originated per production employee per month in the third quarter from 1.7 loans per production employee per month in the second quarter. Production employees include sales, fulfillment, and production support functions.
• Including all business lines (both production and servicing), 46 percent of the firms in the study posted pre-tax net financial profits in the third quarter, down from 57 percent in the second quarter.