Declining secondary marketing income driven by rising interest rates eroded profits at independent mortgage banks and their subsidiaries during the fourth quarter of 2010.
According to the Mortgage Bankers Association's (MBA) Mortgage Bankers Performance Report those profits dropped to an average of $1,082 per loan from $1,423 in the previous quarter. However, in the fourth quarter of 2009 the figure was $890. A total of 321 institutions, 310 of which reported residential production business, responded to the quarterly survey. 70 percent of those with residential production business were independent companies.
Net secondary marketing income decreased from $4,069 (203 basis points) per loan in Q3 to $3,870 (188 basis points) in the fourth quarter. One year ago that income was $3,118. 84 percent of the firms in the study posted pre-tax net financial profits in the fourth quarter of 2010, compared to 88 percent in the third quarter of 2010 and 76 percent in the fourth quarter of 2009.
MBA said that with the favorable third-quarter refinancing rally after an inauspicious start in the first quarter 2010, full-year 2010 production profits will be lower than 2009 but probably within $200 per loan of 2009 levels. In comparison, average production profits in 2009 were $1,135 per loan originated. Average production profits in 2008 were $305 per loan originated. MBA will release its annual summary report for 2010 by early June.
Rising rates, especially in December, affected net gain on sale for many independent mortgage bankers. Marina Walsh, MBA's Associate Vice President of Industry Analysis said, "During the month of December, the average thirty-year fixed mortgage rate was 4.82 percent, about 37 basis points higher than in November and 55 basis points higher than in October. Considering such variables as the timing of rate locks, pull-through expectations, and hedging effectiveness, some mortgage bankers' earnings were hurt by the rapid change in rate environment in the fourth quarter."
Respondents reported that loan volumes continued to increase though. The institutions originated an average of 1,296 loans during the quarter compared to 1,090 in Q3 and 1,086 in the fourth quarter of 2009. The average total volume of loans was $285,788,000 compared to $237,385,000 in the previous quarter and $215,472,000 in Q4 2009 and the average loan balance was $208,391 against $205,863 and $191,838. Production employees closed an average of 4.01 loans per month compared to 3.50 and 3.79 quarter-over-quarter and year-over-year.
First mortgages accounted for 99.43 percent of loan volume with only a tiny smattering of HELOCs, Reverse Mortgages and other real estate loans. Approximately 34.25 percent of first mortgages were government guaranteed loans, a small drop from 36.36 in the third quarter. One year earlier these FHA/VA/RHS loans accounted for 45.83 percent of first mortgages. The remaining first mortgages were conforming, with prime fixed mortgages making up 59.11 percent of the total (earlier figures were 56.82 percent and 47.30 percent.) Respondents originated 99.27 percent of loans for sale to others and 36.35 percent of loans were sold to the GSE, a percentage that has remained stable over the last year.
The average loan to value of loans originated in the four quarter was 77.37 percent compared to 78.76 percent and 81.85 percent in earlier quarters. The average FICO score was 737, three points higher than last quarter and an 18 point improvement year-over-year. About 52 percent of loans were originated for borrowers with FICO scores exceeding 750.
Refinancing represented 63 percent of originations during the quarter compared to 57 percent in the third quarter and 45 percent a year earlier. 40.34 percent of all loans were cash-out refinancings, a substantial increase from the 25.58 percent one year ago.
The average pull-through (the number of closings divided by the number of loan applications) rose to 74 percent in the fourth quarter from 68 percent in the third quarter of 2010. The year-over-year change was slight, rising from 73.07 percent.
Total personnel expense rose slightly to $3,124 per loan in the fourth quarter of 2010, compared to $3,034 per loan in the third quarter of 2010. In the fourth quarter 2009, personnel expenses averaged $2,756 per loan. The average company had 165 full-time equivalent (FTE) production employees about half of which were classified as "sales" personnel
Net Financial Income in Q4 (expressed in Basis Points) was (136.23) compared to (135.47) and (121.73) in the previous periods. Net Interest income was 2.41bps against 3.87 and 6.26. Net Secondary Marketing Income was 187.88bps compared to 203.06 and 164.48, and Total Net Production Income was 54.07 (BP) compared to 71.46 and 49.01.
The "net cost to originate" increased to $2,827 per loan from $2,720 in the previous quarter and $2,345 a year earlier. "Net cost to originate" includes all production operating expenses and commissions minus all fee income, but excludes secondary marketing gains, capitalized servicing, servicing released premiums and warehouse interest spread
159 companies among the respondents service loans. The average servicing portfolio totaled $7,027,082,000, down from $10,259,995,000 a year earlier. Average loans serviced fell from 74,316 one year ago to 44,799 in the recent quarter. Per loan income from servicing was $233 per loan and Net Servicing Financial Income was $139; both were substantial improvements over the earlier periods. In the third quarter income was $216 and Net Income was ($41). One year ago the figures were $193 and $37. The increase in net income might be accounted for by personnel costs. Companies serviced an average of 955 loans per FTE employee in the recent period, up from 849 last quarter and 787 a year earlier.
