Lending

It's official: TRID kills mortgage profits

Total production expenses surge to $7,747 per loan

money squeezed

The net gain on each loan originated by independent mortgage banks and mortgage bank subsidiaries plummeted 60% in the fourth quarter of 2015 due to the implementation of the Consumer Financial Protection Bureau’s TILA-RESPA Integrated Disclosures rule in October.  

Net gains only reached $493 on each loan they originated in the fourth quarter, down from a whopping $1,238 per loan in the third quarter of 2015, the Mortgage Bankers Association reported in its Quarterly Mortgage Bankers Performance Report.

“Production profits dropped by over 60% in the fourth quarter of 2015 compared to the third quarter,” said Marina Walsh, MBA’s vice president of industry analysis. “With the Know Before You Owe rule going into effect last October 3rd and declining production volume compared to the third quarter of 2015, mortgage bankers saw their total loan production expenses climb to $7,747 per loan, from $7,080 per loan in the third quarter.”

Walsh added, “The fourth quarter marked the second highest level of production expenses per loan since the inception of our report in the third quarter of 2008.”

Total loan production expenses – commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations – surged to $7,747 per loan in the fourth quarter of 2015, jumping from $7,080 in the third quarter of 2015. 

Furthermore, personnel expenses averaged $5,131 per loan in the fourth quarter of 2015, up from $4,674 per loan in the third quarter. 

However, Walsh said, “The average production volume per company was nearly double the first quarter of 2014, when production expenses reached a study-high of $8,025 per loan. The increase in total production expenses per loan in the fourth quarter of 2015 cannot be explained solely by volume fluctuations.”

Average production volume tumbled to $538 million per company in the fourth quarter of 2015, down from $614 million per company in the third quarter of 2015.  To put this in perspective, in the first quarter of 2014 when per-loan production expenses were at a study-high, the average production volume was $274 million per company.  Also, since the inception of the Performance Report in the third quarter of 2008, production volume per company has averaged $332 million.

The volume by count per company also fell, averaging 2,265 loans in the fourth quarter of 2015, down from 2,609 loans in the third quarter of 2015.

In comparison, in the first quarter of 2014 when per-loan production expenses were at a study-high, the average volume by count was 1,238 loans per company.  Since the inception of the Performance Report in the third quarter of 2008, the quarterly production count has averaged 1,491 loans.

Other key elements that contributed to the making of the net gain number include:

Total production revenue (fee income, secondary marking income and warehouse spread) stayed flat at 362 basis points in the fourth quarter of 2015, compared to the third quarter. 

The "net cost to originate" shot up to $6,163 per loan in the fourth quarter of 2015, up from $5,549 in the third quarter.

The "net cost to originate" includes all production operating expenses and commissions, minus all fee income, but excludes secondary marketing gains, capitalized servicing, servicing released premiums, and warehouse interest spread.

Productivity slightly decreased to 2.4 loans originated per production employee per month in the fourth quarter of 2015, down from 2.5 in the third quarter.

Including all business lines, 72% of the firms in the study posted pre-tax net financial profits in the fourth quarter of 2015, down from 86% in the third quarter of 2015. 

In addition, the average pre-tax production profit was 22 basis points (bps) in the fourth quarter, compared to an average net production profit of 55 bps in the third quarter of 2015.  Since the inception of the Performance Report in the third quarter of 2008, net production income has averaged 53 bps.

The purchase share of total originations, by dollar volume, was 66% in the fourth quarter of 2015, down from 70% in the third quarter of 2015.  For the mortgage industry as a whole, MBA estimates the purchase share at 53% in the fourth quarter of 2015. The jumbo share of total first mortgage originations by dollar volume was 9.34% in the fourth quarter compared to 9.09% in the third quarter. 

The average loan balance for first mortgages increased to $238,481 in the fourth quarter of 2015, up from $238,246 in the third quarter.

Repeated evidence shows the impact of TRID was real, whether the reports were anecdotal or statistical.

Back in October, Walsh talked to HousingWire on what is the exact cost of compliance on mortgage originations?

To answer the question, the she was able to compare the fourth quarter of 2012 to the first quarter of 2015 since the quarters share similar volume periods.

The chart shows there is a difference of nearly $1,600 between the two quarters.

Walsh noted that there has to be an explanation behind this although it’s not a cut and dry answer.

Ultimately, Walsh said, “It has become more expensive to be a originator. There has to be a reason. Either you’re processing, underwriting and closing costs are going up or your sales costs are going up.”

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