Independent Mortgage Banks Experience Production Profit Decrease in Q1 2022

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Independent mortgage banks (IMB) and mortgage subsidiaries of chartered banks reported a net gain of $223 on each loan they originated in the first quarter of 2022, down from a reported gain of $1,099 per loan in the fourth quarter of 2021, according to the Mortgage Bankers Association’s (MBA) newly released Quarterly Mortgage Bankers Performance Report.

“It was a challenging mortgage market environment in the first quarter of 2022, with rising mortgage rates and low housing inventory resulting in lower production volume. The average pre-tax net production income was only 5 basis points, which is the lowest since the fourth quarter of 2018 and well below the quarterly average of 55 basis points dating back to 2008,” says Marina Walsh, CMB, MBA’s vice president of industry analysis. “While lower production revenue contributed to scant profit margins, the primary driver was cost, with total loan production expenses ballooning to a new study-high of $10,637 per loan – up more than $1,000 per loan from fourth-quarter 2021 and more than $2,500 per loan from one year ago.”

Including all business lines (both production and servicing), 72% of the firms in the study posted a pre-tax net financial profit in the first quarter of 2022. Those firms with servicing operations benefited from slower prepayments and low delinquencies that helped boost mortgage servicing right (MSR) valuations. Were it not for servicing operations, only 49% of the firms in the study would have posted a net financial profit in the first quarter of 2022.

“In addition to cost increases, productivity slipped for both sales and fulfillment staff,” adds Walsh. “Furthermore, pull-through rates of closings to applications declined by 5 percentage points in the first quarter, affecting both revenue and cost. With the record-setting refinance volume of the past two years in the rearview mirror, the mortgage industry is clearly in a period of transition and many companies will need to make tough decisions.”

The average pre-tax production profit was 5 basis points (bps) in the first quarter of 2022, down from an average net production profit of 38 bps in the fourth quarter of 2021, and down from 124 basis points on a year-over-year basis. The average quarterly pre-tax production profit, from the third quarter of 2008 to the most recent quarter, is 55 basis points.

Average production volume was $808 billion per company in the first quarter, down from $1.13 billion per company in the fourth quarter of 2021. The volume by count per company averaged 2,587 loans in the first quarter, down from 3,711 loans in last year’s fourth quarter.

Total production revenue (fee income, net secondary marketing income and warehouse spread) decreased to 350 bps in the first quarter, down from 353 bps in the fourth quarter. On a per-loan basis, production revenues increased to $10,861 per loan in the first quarter, up from $10,569 per loan in the fourth quarter.

Net secondary marketing income decreased to 270 bps in the first quarter, down from 275 bps in the fourth quarter. On a per-loan basis, net secondary marketing income increased to $8,429 per loan in the first quarter from $8,326 per loan in the fourth quarter.

The purchase share of total originations, by dollar volume, increased to 63% in the first quarter from 60 percent in the fourth quarter. For the mortgage industry as a whole, MBA estimates the purchase share was at 55% in the first quarter of 2022.

The average loan balance for first mortgages increased to a new study high of $324,368 in the first quarter, up from $312,306 in the fourth quarter. The average pull-through rate (loan closings to applications) decreased to 73% in the first quarter, down from 78% in the fourth quarter.

Total loan production expenses – commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations – increased to a study-high of $10,637 per loan in the first quarter, up from $9,470 per loan in the fourth quarter of 2021. From the third quarter of 2008 to last quarter, loan production expenses have averaged $6,829 per loan. Personnel expenses averaged $7,113 per loan in the first quarter, up from $6,438 per loan in the fourth quarter.

Productivity decreased to 1.8 loans originated per production employee per month in the first quarter from 2.4 loans per production employee per month in the fourth quarter. Production employees includes sales, fulfillment, and production support functions.

Servicing net financial income for the first quarter (without annualizing) was at $242 per loan, up from $71 per loan in the fourth quarter. Servicing operating income, which excludes MSR amortization, gains/loss in the valuation of servicing rights net of hedging gains/losses and gains/losses on the bulk sale of MSRs, was $94 per loan in the first quarter, up from $87 per loan in the fourth quarter.

Including all business lines (both production and servicing), 72% of the firms in the study posted pre-tax net financial profits in the first quarter, down from 76% in the fourth quarter.

Read the full report here.

Photo by Ronnie George on Unsplash

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