The net profit independent mortgage banks made on each loan they originated in the fourth quarter of 2013 dropped by nearly 80% compared to the third quarter, according to the Mortgage Bankers Association's (MBA) Quarterly Mortgage Bankers Performance Report.
Back in the third quarter, the average profit a mortgage bank made on a loan was about $743, according to the report – however, as of the fourth quarter, it was about $150.
The reason average profit per loan is down is simply that it has become more expensive to process mortgages. Total loan production expenses, including commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations, increased to $6,959 per loan in the fourth quarter, up from $6,368 in the third quarter. This is the highest recorded in any quarter since the report was created in the third quarter of 2008.
Personnel expenses averaged $4,385 per loan in the fourth quarter, up from $4,130 per loan in the third quarter.
The ‘net cost to originate’ was $5,171 per loan in the fourth quarter, up from $4,573 in the third quarter. The ‘net cost to originate’ includes all production operating expenses and commissions, minus all fee income, but excluding secondary marketing gains, capitalized servicing, servicing released premiums and warehouse interest spread.
‘Fourth-quarter production profits were at their lowest levels since inception of the Performance Report in 2008, driven by study-high costs in a declining mortgage market,’ says Marina Walsh, vice president of industry analysis for the MBA, in a statement. ‘One consolation was in mortgage servicing, where financial income improved. However, not all mortgage companies retained mortgage servicing rights or generated margins large enough to offset production losses. It is perhaps not surprising that only 58 percent of participating companies had overall positive pre-tax profits in the quarter.’
In addition to the rising cost of originating loans, origination volume – including both purchases and refinances – continues to shrink. Average production volume was $367 million per company in the fourth quarter, down from $391 million per company in the third quarter. The volume by count per company averaged 1,641 loans in the fourth quarter, down from 1,788 in the third quarter.
In January, the MBA revised down its origination volume forecast for 2014, with originations now anticipated to reach $1.12 trillion for the year – a decrease of about 35% compared to 2013. Previously, the MBA had forecast that origination volume would decrease about 32% in 2014, reaching $1.2 trillion, compared to $1.7 trillion in 2013, due mainly to rising interest rates.
The report does not mention whether the Consumer Financial Protection Bureau's new mortgage rules – including the new rule that caps fees at 3% of the loan amount – were a contributor to the reduced average profit per loan.