Ask any mortgage banker how well they did in terms of origination volume in 2018 and they will likely say it was not the greatest year.
They’ll also likely say profits took a substantial hit, due mainly to rising production costs.
So, just how bad was it?
According to the Mortgage Bankers Association’s (MBA) Annual Performance Report, 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.
“Despite a healthy economy in 2018, the mortgage market suffered, as rate hikes hurt refinancing volume and low housing inventories priced some potential homebuyers out of the purchase market,” says Marina Walsh, vice president of industry analysis for the MBA, in a statement. “For mortgage companies, there was the perfect storm of lower production revenues combined with rising expenses, which together contributed to the lowest net production income per loan since 2008.”
Average production volume for mortgage lenders that shared their data with the MBA was $2.0 billion (8,171 loans) per company in 2018, down from $2.13 billion (8,882 loans) per company in 2017.
On a repeater company basis, average production volume was $2.07 billion (8,502 loans), down from $2.11 billion (8,824 loans) in 2017.
For the mortgage industry as whole, the MBA estimates production volume reached $1.64 trillion in 2018, down from $1.76 trillion in 2017.
Average production profit (net production income) was 14 basis points in 2018, compared to 31 basis points in 2017.
In the first half of 2018, net production income averaged 18 basis points, then dropped to nine basis points in the second half.
Since the inception of the report in 2008, net production income by year has averaged 49 bps, or $1,020 per loan.
Of course, a major reason for the decline in volume was rising interest rates, which led to a drop-off in refinances. For the mortgage industry as a whole, the MBA estimates the refinancing share last year decreased to 28%, down from 35% in 2017.
The average loan balance for first mortgages reached a study-high of $251,084 in 2018, up from $245,500 in 2017. It was the ninth consecutive year of rising loan balances on first mortgages.
Total production revenues (fee income, net secondary marking income and warehouse spread) were 362 basis points, down from 379 bps in 2017.
On a per-loan basis, production revenues were $8,645 per loan, down from $8,793 per loan.
Total loan production expenses – commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations – increased to $8,278 per loan in 2018, up from $8,082 in 2017.
Personnel expenses averaged $5,524 per loan, up from $5,346 in 2017.
Mortgage servicers, however, did not make out badly in 2018. Net servicing income, which includes net servicing operational income, as well as mortgage servicing right (MSR) amortization and gains and losses on MSR valuations, was $203 per loan in 2018, up from $64 per loan in 2017.
The rise in interest rates that came in the second half helped servicers to some degree.
“For those holding mortgage servicing rights (MSR), it was the silver lining that boosted overall profitability,” Walsh says. “Including both production and servicing operations, 69 percent of the firms posted overall pre-tax net financial profits in 2018, compared to only 47 percent of firms with net servicing income excluded.”
Including all business lines, 69% of the firms participating in the study posted pre-tax net financial profits in 2018, down from 80% in 2017.
In the first half of 2018, 73% of reporting repeater firms posted pre-tax financial profits, compared to 55% in the second half of 2018.
Of the 280 firms that reported production, 80% were independent mortgage companies while 20% were subsidiaries and other non-depository institutions.