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Loans and Profits Dip for Independent Lenders

Rising interest rates resulted in reducing the number of loans processed as well as profits for independent mortgage banks and mortgage subsidiaries of chartered banks in Q4 of 2016. This information was revealed in the Quarterly Mortgage Bankers Performance Report released today by the Mortgage Bankers Association.

Of the 353 companies reporting, 74 percent reporting were independent mortgage companies and the remaining 26 percent were subsidiaries and other non-depository institutions.

The report revealed that independent banks reported a net gain of $575 on each loan they originated in the fourth quarter of 2016 compared to a net gain of $1,773 per loan in Q3 of 2016.

“Rapid increases in interest rates in the last two months of 2016 slowed mortgage activity in the fourth quarter, driving a significant decrease in loan production profits,” said MBA VP of Industry Analysis Marina Walsh.

On the revenue side, secondary marketing income dropped as mortgage lenders wrestled with less favorable pricing and pipeline challenges. At the same time, production expenses per loan rose as fixed costs were spread over fewer loans.  

The report also revealed that mortgage lenders with servicing portfolios benefited from higher net servicing financial income in the fourth quarter due to increases in the valuation of their mortgage servicing rights, driven by the same rising interest rates. “However, the reduced profitability on the production side of the business generally outweighed servicing gains,” Walsh said.

Key findings of MBA’s Quarterly Mortgage Bankers Performance Report include:

  • Average production volume was $690 million per company in Q4 of 2016, down from $764 million per company in Q3 of 2016.
  • The volume by count per company averaged 2,811 loans in Q3 of 2016, down from 3,072 loans in the third quarter of 2016.
  • The average pre-tax production profit was 24 basis points (bps) in the fourth quarter of 2016, down from an average net production profit of 74 bps in the third quarter of 2016.
  • The purchase share of total originations, by dollar volume, was 58 percent in the fourth quarter of 2016, compared to 60 percent in Q3 of 2016. For the mortgage industry as a whole, MBA estimates the purchase share at 49 percent in the fourth quarter of 2016.
  • The average loan balance for first mortgages was $246,473 in Q4 of 2016, down from the previous study-high of $251,398 in the third quarter of 2016.
  • The average pull-through rate (loan closings to applications) was a study-high 76.45 percent in the fourth quarter of 2016, up from 73.33 percent in the third quarter of 2016.
  • Total production revenue (fee income, net secondary marking income and warehouse spread) decreased to 347 basis points in the fourth quarter of 2016, down from 365 bps in the third quarter of 2016.  
  • Net secondary marketing income decreased to 272 basis points in Q4 of 2016, down from 291 bps in the third quarter of 2016.  
  • On a per-loan basis, net secondary marketing income decreased to $6,433 per loan in the fourth quarter of 2016, down from $7,037 per loan in the third quarter of 2016.
  • Total loan production expenses – commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations – increased to $7,562 per loan in the fourth quarter of 2016, from $6,969 in the third quarter of 2016.  
  • Personnel expenses averaged $5,001 per loan in Q4 of 2016, up from $4,675 per loan in the third quarter of 2016.
  • Productivity decreased to 2.7 loans originated per production employee per month in Q4 of 2016, from 2.9 in the third quarter. Production employees includes sales, fulfillment and production support functions.
  • Net servicing financial income improved to a year-to-date gain of $34 per loan in the fourth quarter of 2016 from a year-to-date loss of $122 per loan in Q3 of 2016.

Including all business lines, 73 percent of the firms in the study posted pre-tax net financial profits in the fourth quarter of 2016, down from 94 percent in Q3 of 2016.

About Author: Sandra Lane

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