Independent Mortgage Banks Enjoyed Fast Rising Profits in 2019

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Based on the Mortgage Bankers Association's latest Annual Mortgage Bankers Performance Report, independent mortgage banks and mortgage subsidiaries of chartered banks in the U.S. made an average profit of $1,470 on each loan they originated in 2019, up from $367 per loan in 2018.

"2019 was a much improved mortgage market compared to the very challenging environment for the industry in 2018," said Marina Walsh, MBA's Vice President of Industry Analysis. "After an unfavorable first quarter, independent mortgage companies saw significant improvement in profitability starting in the second quarter, driven by a jump in refinancing activity from the steady decline in mortgage rates. As volume escalated, production costs dropped from 2018 levels by $743 per loan."

Added Walsh, "For companies holding mortgage servicing rights (MSR), one downside was that prepayment activity triggered heavy MSR amortization and write-downs. These write-downs were particularly painful for servicers that did not hedge their MSRs."

According to Walsh, profits on the production side of the business generally compensated for servicing losses. Including both production and servicing operations, 92 percent of the firms posted pre-tax net financial profits in 2019, compared to only 69 percent of firms in 2018.

"For many IMBs, 2019 is now a distant memory because of the mortgage market disruption caused by the ongoing COVID-19 pandemic," said Walsh. "The many pain points right now for IMBs include liquidity constraints, volatility in the secondary markets, capacity issues from heightened refinance activity, mortgage origination obstacles due to social distancing, and escalating forbearance activity. All of these challenges could factor into the future profitability of many IMBs."

Among the other key findings of MBA's 2019 Annual Mortgage Bankers Performance Report:

• Average production volume was $2.7 billion (10,411 loans) per company in 2019, up from $2.0 billion (8,171 loans) per company in 2018. On a repeater company basis, average production volume was $2.94 billion (11,227 loans) in 2019, up from $2.14 billion (8,805 loans) in 2018. For the mortgage industry as whole, MBA estimates production volume at $2.17 trillion in 2019, up from $1.68 trillion in 2018.

• In basis points (bps), the average production profit (net production income) was 58 bps in 2019, compared to 14 bps in 2018. In the first half of 2019, net production income averaged 46 bps, then roe to 64 bps in the second half of 2019. Since the inception of MBA's Annual Performance Report in 2008, net production income by year has averaged 50 bps ($1,057 per loan).

• The refinancing share of total originations (by dollar volume) increased to 34 percent in 2019 from 20 percent in 2018. For the mortgage industry as a whole, MBA estimates the refinancing share last year increased to 41 percent from 28 percent in 2018.

• The average loan balance for first mortgages reached a study-high of $266,533 in 2019, up from $251,084 in 2018. This is the 10th consecutive year of rising loan balances on first mortgages.

• Total production revenues (fee income, net secondary marking income and warehouse spread) were 356 bps in 2019, down from 362 bps in 2018. On a per-loan basis, production revenues were $9,004 per loan in 2019, up from $8,645 per loan in 2018.

• Total loan production expenses - commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations - were $7,535 per loan in 2019, down from $8,278 in 2018.

•  Personnel expenses averaged $5,094 per loan in 2019, down from $5,524 per loan in 2018.

• Productivity was 2.3 loans originated per production employee per month in 2019, up from 1.8 in 2018. Production employees include sales, fulfillment and production support functions.

• Net servicing financial income, which includes net servicing operational income, as well as MSR amortization and gains and losses on MSR valuations, was $116 per loan in 2019, down from $203 per loan in 2018.

• Including all business lines, 92 percent of the firms in the study posted pre-tax net financial profits in 2019, up from 69 percent in 2018. In the first half of 2019, 85 percent of reporting repeater firms posted pre-tax financial profits, compared to 93 percent in the second half of 2019.