Nonbank mortgage profits hurt by high costs in Q1

Higher costs, lower productivity and fewer applications making it through to closing explain why independent mortgage bankers made an average pretax net production profit of 5 basis point per origination in the first quarter, according to the Mortgage Bankers Association.

“While lower production revenue contributed to scant profit margins, the primary driver was cost, with total loan production expenses ballooning to a new study-high of $10,637 per loan — up more than $1,000 per loan from fourth-quarter 2021 and more than $2,500 per loan from one year ago,” Marina Walsh, the MBA’s vice president of industry analysis, said in a press release.

The organization shared preliminary data at its Secondary & Capital Markets Conference in New York on May 16. The 5 bps earned are the least since IMBs lost 11 bps per loan in the fourth quarter of 2018.

Some larger lenders, both bank and nonbank, have been protecting their margins by restricting origination activity, a Keefe, Bruyette & Woods report said. A group of nine lenders averaged 149 bps of gain-on-sale margin, with Rocket at the upper end at 301 bps and Flagstar at 58 bps.

“In addition to cost increases, productivity slipped for both sales and fulfillment staff,” Walsh noted. “Furthermore, pull-through rates of closings to applications declined by 5 percentage points in the first quarter, affecting both revenue and cost.”

Industry profitability took a hit as a result, as only 72% of those firms in the MBA study recorded a pretax financial net profit — inclusive of both origination and servicing — in the first quarter, compared with 76% in the fourth quarter and 97% one year prior.

For many, their servicing business made the difference; only 49% of IMBs were profitable without the income from that part of their business.

The $223 net gain per loan originated was almost 80% lower than the $1,099 earned in the fourth quarter. In the first quarter of 2021, mortgage bankers’ net gain per loan was $3,361.

But the ever increasing average loan size boosted margins for IMBs. In the first quarter, that was a high of $324,368, up from $312,306.

Staff productivity — both sales and back office — decreased to 1.8 loans originated per employee per month in the first quarter from 2.4 loans in the fourth quarter.

Rising mortgage rates led more applicants to change their minds about going through with their loan, resulting in an average pull-through rate of 73%. This was lower than 78% in the fourth quarter and 76% for the first quarter of 2021.

The first quarter’s per loan expenses were up from $9,470 per loan in the fourth quarter and $5,523 one year prior. From the third quarter of 2008 through last quarter, loan production expenses averaged $6,829 per loan.

As for the good news, net financial income from servicing activities for the first quarter was at $242 per loan, up approximately 240% from $71 per loan in the fourth quarter. Servicing operating income, which excludes mortgage servicing rights amortization, any gains or loss in their valuation net of hedging and on portfolio bulk sales, was $94 per loan in the first quarter, up from $87 per loan in the fourth quarter.