BLOG VIEW: Are mortgage profits really down because of the Consumer Financial Protection Bureau’s new TILA-RESPA Integrated Disclosures (TRID) rule, which took effect last fall?
At first, it might seem as though there is a fairly good case against TRID. According to the Mortgage Bankers Association (MBA), independent mortgage banks and bank mortgage subsidiaries had profits of $493 for each loan they originated in the fourth quarter of 2015 – down from $1,238 in the third quarter.
That’s a 60% drop and evidence that the TRID rules – which went into effect Oct. 3, 2015 – are the culprit. The obvious conclusion is that the government is messing with the private sector and stifling capitalism. Many now believe that we should reduce regulation, revert to a free market system of some sort and rescind the TRID regulations in their entirety.
But before the battle begins, let’s consider an alternative thought: TRID may not be so bad. Indeed, TRID may actually be a very good deal, the best lenders are likely to see for a very long time. Not only that, but it may be that TRID’s apparently negative impact on the bottom line is less certain than initial numbers suggest.
Profits Per Loan
The MBA’s numbers show that profits per loan went from $1,238 in the third quarter of 2015 to $493 in the fourth quarter. It sure seems like mortgage lenders took a regulation-induced drubbing – but that’s not quite the whole story. For instance, in 2014, profits fell from $897 per loan in the third quarter to $744 in the fourth quarter. Could it be that loan profits naturally and normally fall between the third and fourth quarters? After all, in the fourth quarter, there are a number of major holidays, as well as objectively worse weather in much of the country, so perhaps at year-end, there’s simply less business to offset fixed costs.
And maybe, just maybe, $493 per loan is a pretty sweet deal for lenders.
For instance, in 2013, we see once more that profits per loan in the third quarter were larger than in the fourth quarter. According to the MBA, profits in the third quarter of 2013 amounted to $743 per loan but just $150 per loan in the fourth quarter.
In other words, in 2013, profits per loan fell 80%. That’s even more than the 60% decline in 2015. And you can’t blame TRID because in 2013, there were no TRID rules in place.
Using MBA figures, it appears that fourth-quarter profits per loan have more than tripled during the past two years, going from $150 in 2013 to $493 in 2015.
“There’s no doubt that the TRID regulations have created new layers of complexity, as well as additional lender costs,” says Rick Sharga, executive vice president at Ten-X.com, an online real estate marketplace. “If the net result is fewer buybacks and lower foreclosure levels, then some of the new costs will be offset. More importantly, if TRID is replaced tomorrow, there’s no assurance that what comes next might not be worse.”
Looking at quarterly revenues provides a way to measure origination profits; however, if one looks at a longer span of events, one gets a different picture.
It turns out that 2015, despite a lot of concern at year-end, actually produced a strong annual showing. “Independent mortgage banks and mortgage subsidiaries of chartered banks made an average profit of $1,189 on each loan they originated in 2015,” says the MBA, which is “up from $747 per loan in 2014.”
Part of the reason for the larger profit level per mortgage is that loans are simply larger. Average loan balances increased 7% between 2014 and 2015, according to the MBA, and were up 22% when compared with 2008.
The MBA figures include another useful measure to better understand TRID’s impact: It turns out that in the fourth quarter of 2015, 72% of the firms in the study posted pre-tax net financial profits. That compares with 58% in 2013. Once again, it can be argued that things have actually improved under TRID.
“Production profits dropped by over 60 percent in the fourth quarter of 2015 compared to the third quarter,” says Marina Walsh, vice president of industry analysis for the MBA. “With the Know Before You Owe (TRID) rule going into effect last Oct. 3, and declining production volume compared to the third quarter of 2015, mortgage bankers saw their total loan production expenses climb to $7,747 per loan from $7,080 per loan in the third quarter.”
It turns out that back in the first quarter of 2014 – before the TRID rules went into effect – loan production expenses stood at $8,025 per loan. Given that $8,025 is more than $7,747, maybe something besides TRID is impacting mortgage costs.
Dr. Matt Lind, senior partner with mortgage consultancy STRATMOR Group, told us that in a March survey conducted by his organization, lenders “reported a $209-per-loan increase in costs that they attribute to TRID. Other parties attribute the roughly $650 increase in the cost per loan from 3Q to 4Q 2015 entirely to TRID. However, a careful analysis – which is what we do at STRATMOR – would show that roughly $430 of that amount is a result of a 12.5 percent decline in volume from the third quarter of 2015 to the fourth quarter of 2015, causing a 14.3 percent increase in fixed cost per unit originated.”
The Real Issue
“TRID is here, and the odds of it going away are very small,” says Sharga. “While there has been a rough transition, we may see over the next few quarters that new revenues and growing profits are possible. If that turns out to be the case, then a lot of the headaches associated with TRID will fade away.”
Peter G. Miller is a nationally syndicated real estate columnist. His books, published originally by Harper & Row, sold more than 300,000 copies. He blogs at OurBroker.com and contributes to such leading sites as RealtyTrac.com, the Huffington Post and Ten-X. Miller has also spoken before such groups as the National Association of Realtors and the Association of Real Estate License Law Officials.