Mortgage bank profits declined in the third quarter of 2017 when compared to the second quarter, but remained substantially higher than in the two rather disastrous quarters that preceded it. The Mortgage Bankers Association (MBA) says that independent mortgage banks and mortgage subsidiaries of chartered banks reported a net gain of $929 on each loan they originated in the third quarter of 2017.
Per loan profits reported for the second quarter were $1,122 as lower interest rates boosted loan volumes. Rising rates in late 2016 had driven volumes, especially refinancing, down and per loan production expenses up. Fourth quarter 2016 profits dropped by about two-third to $575 per loan and dropped still further in the first quarter of 2017 to $224.
"Production profits dropped slightly in the third quarter of 2017 compared to the second quarter of 2017," said Marina Walsh, MBA's Vice President of Industry Analysis. "Despite rising average production volume, production expenses grew to $8,060 per loan - the second highest level reported since the inception of our study in the third quarter of 2008. Production revenues remained relatively flat, with a minimal uptick in per-loan production revenues resulting from higher loan balances."
"Historically for this study, average production profits in the third quarter of the year have performed slightly below the second quarter. But production profits were also down in relation to historical averages for the third quarter. In the third quarter of 2017, profits were $929 per loan, compared to a third quarter average of $1,197 per loan since inception of the Performance Report in the third quarter of 2008."
"For those mortgage bankers holding mortgage servicing rights (MSR), lower MSR valuation losses helped overall profitability," Walsh continued.
MBA said average per company production during the third quarter was 2,341 loans with volume of $569 million. In the second quarter there was an average of 2,177 loans and volume of $526 million. For the mortgage industry as a whole, MBA estimates for production volume were flat compared to the second quarter.
Average pre-tax production profit was 40 basis points (bps) in the third quarter of 2017, down from an average net production profit of 46 bps in the second quarter of 2017.
Total production revenue (fee income, net secondary marking income and warehouse spread) decreased slightly to 375 basis points in the third quarter from 377 bps in the second. However, with rising loan balances, (the average first mortgage balance was $251,109, up from $248,619 in Q2) production revenues increased to $8,990 per loan from $8,896.
Net secondary marketing income decreased to 298 bps, down from 302 bps in the second quarter of 2017. On a per-loan basis, net secondary marketing income increased to $7,181 from $7,160. Net servicing financial income increased to $79 from $27 per loan in the second quarter.
Total loan production expenses - commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations - increased to $8,060 per loan from $7,774. MBA said these expenses have averaged $6,090 since the third quarter of 2008. Personnel expenses averaged $5,279 per loan, compared to $5,119 per loan the previous quarter.
The purchase share of total originations, by dollar volume, was 74 percent after reaching a survey high of 76 percent in the second quarter of 2017. For the mortgage industry as a whole, MBA estimates the Q3 purchase share at 68 percent in the third quarter of 2017.
Productivity decreased to 2.1 loans originated per production employee per month in the third quarter from 2.5 in the second. Production employees include sales, fulfillment and production support functions. The average pull-through rate (loan closings to applications) was 73 percent compared to 72 percent in Q2.
Including all business lines, 77 percent of the firms in the study posted pre-tax net financial profits in the third quarter, down from 86 percent in the prior period.
MBA says 347 companies responded to its survey, the basis of its Mortgage Bankers Performance Report. Seventy-five percent of the companies were independent mortgage companies and the remaining 25 percent were subsidiaries and other non-depository institutions.