Independent Mortgage Bankers Brace For Declining Revenue In 2014

Mortgage production fell about 12.4% in the third quarter, compared to the second quarter, according to Richey May & Co.'s 2013 third-quarter trend report for independent mortgage bankers.

Most of the drop was due to a sharp decline in refinancing resulting from rising mortgage rates. Refinancing volume dropped by more than 40% in the third quarter compared to the second quarter, according to the firm.

Many small- to medium-size lenders have turned to servicing in the past year to help compensate for the shortfall in revenue resulting from declining origination volume. Some are bringing their servicing in-house, while others are selling their mortgage servicing rights in an effort to bolster their bottom lines.

‘Servicing is definitely playing a role in offsetting the declines in origination volume,’ says Ken Richey, managing partner of Richey May, in a statement. ‘Some lenders have sold portions of their servicing portfolios to compensate for decreases in production and profitability. Others are incorporating servicing as part of their business models, which can be a good option for lenders that can handle the cash flow constraints that are typical of mortgage servicing.’

According to the firm's quarterly survey, the five biggest banks originated 53.2% of total mortgages in the U.S. in 2012, down from nearly two-thirds in 2010. A recent FBR Capital Markets report forecasts that the big banks' market share will shrink to 40% by 2014.

Meanwhile, independent mortgage bankers have moved in to snap up an increasing share of the market. The big question for these independents, looking to 2014, however, is whether the overall decline in volume, as well as the expenses they will incur due to new regulations, will outstrip revenue to the point where they will need to reduce staff.

On average these independents saw net income drop 60 basis points from the second quarter, according to the report. However, lenders with servicing portfolios in place prior to the third quarter realized smaller declines than those who had no servicing interests, Richey May notes.

Other key findings of the report include the following:

  • The percentage of borrowers whose FICO scores are less than 700 increased from 25% in the second quarter to 30% in the third quarter;
  • Average values of servicing portfolios increased by seven basis points, or 0.07%, from the second quarter to the third quarter; and
  • Loan margins decreased 42 basis points in the third quarter as compared to the second quarter.

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