Small, Midsized Mortgage Bankers Display Nimbleness

Mortgage bankers managed to make a marginal profit of $184 per loan on every loan they originated in the second half of 2008, despite lower net warehousing income and higher production operating expenses, according to the Mortgage Bankers Association (MBA).

This modest profit marks an improvement over average per-loan losses in 2006 and 2007, according to the MBA's Annual Mortgage Bankers Performance Report.

‘Many independent mortgage companies and bank subsidiaries made radical changes in their product offerings in order to remain alive in 2008,’ notes Marina Walsh, MBA's associate vice president of industry analysis. "Among this group, the government share of total originations, mainly [Federal Housing Administration (FHA)] loans, was 45 percent in the second half of 2008, compared to less than 10 percent the year before.

"Small and midsized mortgage bankers were able to quickly respond to changing secondary market conditions, as they had the flexibility to realign their business models toward FHA business, and it was a key to their profitability," Walsh says.

The average firm posted pre-tax net financial income of $700,000 in 2008, compared to $900,000 in 2007 and $6.4 million in 2006, the MBA report finds. Fifty-nine percent of the firms in the study posted pre-tax net financial profits. The remaining 41% – primarily firms with asset sizes less than $10 million – posted overall net financial losses.

Mortgage banking production profits were 8.75 basis points, or $184 per loan – a modest improvement over the previous two years (2006-2007), in which net losses of around $50 and $560 were reported, respectively. Many firms that were not profitable in production exited the market in 2007 and 2008, so the increase in profitability may be partly driven by having only the surviving firms in the survey, the MBA adds.

The "net cost to originate" (i.e., all origination operating expenses and commissions minus all fee income and excluding secondary marketing gains, capitalized servicing, servicing-released premiums and warehouse interest spread) fell to $2,291 per loan in 2008, the study shows. The average number of loan closings to number of loan applications, or the pull-through rate, was 56.6%.

Servicing financial profits per loan dropped to an average loss of $19 per loan (or 1.24 basis points) from a $109 per loan profit in 2007. Many servicers reported mortgage servicing right impairments in the fourth quarter of 2008, as interest rates dropped and refinancings ramped up.



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