With shrinking volume and rising production costs, it’s no wonder mortgage lenders are having a miserable time realizing decent profits.
According to the Mortgage Bankers Association’s (MBA) Annual Performance Report, released in April, independent mortgage banks and mortgage subsidiaries of chartered banks made an average profit of $367 on each loan they originated in 2018, down from $711 per loan in 2017.
In fact, the situation became so bad toward the tail-end of the year that lenders realized an average net loss of about $200 per loan in the fourth quarter, according to the MBA’s Quarterly Mortgage Performance Report.
Fortunately, mortgage bankers saw profits inch back into the black in the first quarter. As per the most recent quarterly report, they realized a net gain of $285 per loan – this despite falling origination volume.
Rising production costs have been the main culprit. According to the MBA’s data, total loan production expenses including commissions, compensation, occupancy, equipment and other production expenses and corporate allocations increased to a study high of $9,299 per loan in the first quarter, up from $8,611 in the fourth quarter.
It’s important to note, however, that these figures are averages. Not all mortgage lenders are realizing losses; in fact, some are seeing increasing profits.
A recent report from mortgage consultancy STRATMOR group reveals an interesting – but perhaps not surprising – trend: Large banks lag far behind their independent competitors when it comes to making a profit on retail residential mortgages.
The study – based on findings gleaned from peer group roundtable sessions conducted jointly by the MBA and STRATMOR with 92 mortgage lenders – reveals that large banks realized an average loss of $4,803 per retail mortgage loan originated in 2018, while large independent lenders realized an average profit of $376 per loan.
“The trends we noted in the [peer group sessions] were consistent with what STRATMOR has found across many of our large bank clients: low revenues, high expenses and trend lines that are moving in the wrong direction,” says Tom Finnegan, a principal for STRATMOR, in the firm’s just-released June 2019 Insights Report.
A number of factors contribute to the disparity in costs and revenue.
“Large banks experience a significant disadvantage in the expenses we categorize as ‘corporate administration’,” Finnegan explains. “Corporate administration costs amounted to $3,654 per loan in 2018 at the largest banks versus only $1,213 per loan for the large independents – a $2,441 per loan disadvantage for the large banks.
“Portfolio loans, and jumbo loans specifically, are being priced aggressively by the banks, leading to imputed revenue that is lower than might be expected otherwise,” Finnegan adds.
Another contributing factor is the fact that large lenders are no longer participating in the FHA and VA loan programs to the extent they once were – due mainly to regulatory concerns – whereas the independents have moved more strongly into these programs.
As the report notes, FHA and VA loans typically offer the ability to price with wider margins, thus giving lenders the ability to realize better profits with these programs.
Yet another factor is that large banks are not doing as good of a job as their independent counterparts with regard to customer retention and winning repeat business.
STRATMOR estimates large banks captured only 4% of the available mortgage volume from their customer base, compared to 8.1% at regional banks.
Similarly, large banks recaptured only 12% of their own customers who paid off an existing mortgage, compared to a retention rate of 30% at the large independents.
“When our industry becomes dominated by purchase money mortgages, the large banks’ natural advantage in terms of new loan opportunities dissipates,” Finnegan says.
In addition, many bank loan officers are not incentivized to pursue leads from referral sources outside the bank, such as Realtors.
“The type of loan officer who is attracted to the somewhat less entrepreneurial environment inside a large bank is often not well-suited to compete for external leads,” the report notes.
By sharp contrast, “the lifeblood of independent lenders is their aggressive marketing to referral sources,” Finnegan says.
Large bank policies tend to work against this type of personal marketing.
“The legitimate quest for branding consistency and regulatory compliance can get in the way of personalized marketing and rapid response to the needs of the real estate community,” Finnegan says. “Moreover, mortgage origination must compete for marketing dollars with other areas of the bank, and often does not come out on top.”
Another factor driving the disparity in average profits is technology investment: Independents have so far been much better in harnessing technology to reduce operating costs compared with the large banks.
“Large banks appear to have great difficulty translating technological expertise and resources into efficient technology support for the mortgage origination business,” the report states. “Large banks’ IT projects appear to get mired in process considerations and take years to roll out, if they are rolled out at all. Clearly, this is an area that many of the largest banks should review.”
Finnegan says large banks that want to remain involved in mortgage need to “operate with an entrepreneurial approach, outstanding marketing and customer focus, and excellent financial reporting on, and management of, the details of the business to achieve acceptable levels of profitability.”