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Independent Mortgage Bank Profits On Loans Fell Nearly 58% In 4Q 2021

David Krechevsky
Mar 23, 2022
profit loss

The MBA study found that 76% of the firms posted a pre-tax net financial profit in the fourth quarter, down from 92% in the third quarter.

KEY TAKEAWAYS
  • Independent mortgage banks and mortgage subsidiaries of chartered banks reported a net gain of $1,099 on each loan originated in the fourth quarter of 2021, down 57.6% from $2,594 per loan in the third quarter.
  • Lower revenue and higher production costs cited for the profit decline.

Banks’ profit margins on mortgages fell more than 50% in the fourth quarter of 2021, according to a new report.

Independent mortgage banks (IMBs) and mortgage subsidiaries of chartered banks reported a net gain of $1,099 on each loan they originated in the fourth quarter of 2021, down 57.6% from $2,594 per loan in the third quarter, according to the Mortgage Bankers Association's (MBA) Quarterly Mortgage Bankers Performance Report.

"Production margins tightened substantially in the fourth quarter of 2021,” said Marina Walsh, MBA’s vice president of industry analysis. “After a two-year run of above-average profitability, pre-tax net production income per loan reached its lowest level since the first quarter of 2019."

Walsh said cited “lower revenues and higher production costs” as primary reasons for the decline in production income.

"The average cost to originate a mortgage has now risen for six quarters in a row, reaching a study-high of almost $9,500 per loan by the end of 2021,” she said. “With revenue tightening and volume slowing, it is becoming increasingly important for companies to adjust costs as the lending landscape moves from a rate-term refinancing market to a purchase and cash-out refinancing market."  

Including all business lines (both production and servicing), 76% of the firms in the study posted a pre-tax net financial profit in the fourth quarter, down from 92% in the third quarter, the MBA said. 

Firms with servicing operations benefited from slower prepayments and low delinquencies that helped boost mortgage servicing right (MSR) valuations, it said. If servicing operations were removed, only 58% of the firms in the study would have posted a net financial profit in the fourth quarter, the MBA said.

Other key findings include:

  • The average pre-tax production profit was 38 basis points (bps) in the fourth quarter of 2021, down from an average net production profit of 89 bps in the third quarter and down from 137 basis points a year earlier.
  • Average production volume was $1.13 billion per company in the fourth quarter, down from $1.17 billion per company in the third quarter. The volume by count per company averaged 3,711 loans in the fourth quarter, down from 3,889 loans in the third quarter.
  • Total production revenue (including fee income, net secondary marketing income, and warehouse spread) decreased to 353 bps in the fourth quarter, down from 396 bps in the third quarter. On a per-loan basis, production revenues decreased to $10,569 per loan in the fourth quarter, down from $11,734 per loan in the third quarter.
  • The purchase share of total originations, by dollar volume, increased to 60% in the fourth quarter, up from 59% in the third quarter. For the mortgage industry as a whole, MBA estimates the purchase share was at 47% in the fourth quarter.
  • The average loan balance for first mortgages increased to a new study high of $312,306 in the fourth quarter, up from $308,237 in the third quarter.
  • Total loan production expenses — commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations — increased to a study-high of $9,470 per loan in the fourth quarter, up from $9,140 per loan in the third quarter. From the third quarter of 2008 to last quarter, loan production expenses have averaged $6,758 per loan.
  • Personnel expenses averaged $6,438 per loan in the fourth quarter, up from $6,185 per loan in the third quarter.
  • Servicing net financial income for the fourth quarter (without annualizing) was at $71 per loan, up from $37 per loan in the third quarter. 

MBA said its Mortgage Bankers Performance Report series is intended as a financial and operational benchmark for independent mortgage companies, bank subsidiaries, and other non-depository institutions. Of the 359 companies that reported production data for the fourth quarter of 2021, 83% were independent mortgage companies; the remaining 17% were subsidiaries and other non-depository institutions.

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