Independent Mortgage Banks' Loan Profits in U.S. Plummet in Late 2016

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According to the Mortgage Bankers Association's latest Quarterly Mortgage Bankers Performance Report, independent mortgage banks and mortgage subsidiaries of chartered banks reported a net gain of $575 on each loan they originated in the fourth quarter of 2016, down from a reported gain of $1,773 per loan in the third quarter 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 Vice President of Industry Analysis Marina Walsh.

"Mortgage lenders reported a combination of both lower revenues and higher expenses.  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,"

"Those 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 continued.

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

• Average production volume was $690 million per company in the fourth quarter of 2016, down from $764 million per company in the third quarter of 2016. The volume by count per company averaged 2,811 loans in the third quarter 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. Since the inception of the Performance Report in the fourth quarter of 2008, net production income has averaged 53 bps.

• The purchase share of total originations, by dollar volume, was 58 percent in the fourth quarter of 2016, compared to 60 percent in the third quarter 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 the fourth quarter 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.  On a per-loan basis production revenues decreased to $8,137 per loan in the fourth quarter of 2016, from $8,742 per loan in the third quarter of 2016.

• Net secondary marketing income decreased to 272 basis points in the fourth quarter 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.  For the period from the third quarter 2008 to the present quarter, loan production expenses have averaged $5,900 per loan.

• Personnel expenses averaged $5,001 per loan in the fourth quarter 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 the fourth quarter 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 the third quarter of 2016.