Independent Mortgage Bank Volumes Decrease, Production Profits Drop in First Quarter of 2017

Real Estate In-Depth | June 2017

WASHINGTON—Independent mortgage banks and mortgage subsidiaries of chartered banks reported a net gain of $224 on each loan they originated in the first quarter of 2017, down from a reported gain of $575 per loan in the fourth quarter of 2016, the Mortgage Bankers Association (MBA) reported on June 6th in its Quarterly Mortgage Bankers Performance Report.

“The drop in overall production volume in the first quarter of 2017 resulted in the highest per-loan production expenses reported since inception of our study in the third quarter of 2008,” said Marina Walsh, MBA’s vice president of Industry Analysis. “While higher production revenues mitigated a portion of the cost increase, production profitability nonetheless declined by more than half the previous quarter.”

Walsh added, “For those mortgage bankers holding mortgage servicing rights (MSR), an increase in mortgage interest rates resulted in MSR valuation gains and helped overall profitability.”

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

Average production volume was $455 million per company in the first quarter of 2017, down from $690 million per company in the fourth quarter of 2016. The volume by count per company averaged 1,944 loans in the first quarter of 2017, down from 2,811 loans in the fourth quarter of 2016.

The average pre-tax production profit was 10 basis points (bps) in the first quarter of 2017, down from an average net production profit of 24 bps in the fourth quarter of 2016. Since the inception of the Performance Report in the third quarter of 2008, net production income has averaged 51 bps.

The purchase share of total originations, by dollar volume, was 68% in the first quarter of 2017, compared to 58% in the fourth quarter of 2016. For the mortgage industry as a whole, MBA estimates the purchase share at 59% in the first quarter of 2017.

The average loan balance for first mortgages was $242,949 in the first quarter of 2017, down from $246,473 in the fourth quarter of 2016.

The average pull-through rate (loan closings to applications) was 70% in the first quarter of 2017, down from the study-high of 76% in the fourth quarter of 2016.

Total production revenue (fee income, net secondary marking income and warehouse spread) increased to 395 basis points in the first quarter of 2017, up from 347 bps in the fourth quarter of 2016. On a per-loan basis, production revenues increased to $9,111 per loan in the first quarter of 2017, from $8,137 per loan in the fourth quarter of 2016.

Net secondary marketing income increased to 322 basis points in the first quarter of 2017, up from 272 bps in the fourth quarter of 2016. On a per-loan basis, net secondary marketing income increased to $7,469 per loan in the first quarter of 2017, up from $6,433 per loan in the fourth quarter of 2016.

Total loan production expenses—commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations—increased to a study-high of $8,887 per loan in the first quarter of 2017, from $7,562 in the fourth quarter of 2016. For the period from the third quarter 2008 to the present quarter, loan production expenses have averaged $5,985 per loan.

Personnel expenses averaged $5,802 per loan in the first quarter of 2017, up from $5,001 per loan in the fourth quarter of 2016.

Productivity decreased to 1.7 loans originated per production employee per month in the first quarter of 2017, from 2.7 in the fourth quarter of 2016. Production employees includes sales, fulfillment and production support functions.

Net servicing financial income was $225 per loan in the first quarter of 2017, compared to a loss of $118 per loan in the first quarter of 2016. Like the fourth quarter of 2016, mortgage companies reported overall gains in the valuation of servicing rights.

Including all business lines, 67% of the firms in the study posted pre-tax net financial profits in the first quarter of 2017, down from 73% in the fourth quarter of 2016.

MBA’s Mortgage Bankers Performance Report series offers a variety of performance measures on the mortgage banking industry and is intended as a financial and operational benchmark for independent mortgage companies, bank subsidiaries and other non-depository institutions. 76% of the 342 companies that reported production data for the first quarter of 2017 were independent mortgage companies and the remaining 24% were subsidiaries and other non-depository institutions.