Good news! Closing a mortgage still makes money

Origination volumes rise, but profits are down slightly

Mortgage bankers can breathe easy and sleep soundly again, because there’s good news. The cost of originating a mortgage, which was once called ridiculous and astronomical, is now decidedly less so. For the second quarter in a row, originating a mortgage is actually a profitable endeavor.

In the third quarter, independent mortgage banks and mortgage subsidiaries of chartered banks reported a profit of $897 per loan, down slightly from the second quarter’s reported profit of $954 per loan, according to the latest Quarterly Mortgage Bankers Performance Report from the Mortgage Bankers Association.

The fact that banks actually made money on the loans they originated in the third quarter is a positive trend, considering that in the second quarter, those same banks reversed a six-quarter streak of losing money on mortgage originations, reporting a net gain of $954 as opposed to a net loss of $194 in the first quarter.

According to the MBA report, the average production profit was 42 basis points in the third quarter, compared to an average net production profit of 46 bps in the second quarter of 2014. 

The decrease in profit didn’t come because of banks’ internal operating costs, according to the MBA report.

The banks reported that total loan production expenses, which includes commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations, decreased in the third quarter, falling to $6,769 per loan from $6,932 in the second quarter.

Personnel expenses were down slightly in the third quarter to an average of $4,401 per loan in, from $4,423 per loan in the second quarter.

According to the MBA, the “net cost to originate,” which 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, was $5,038 per loan in the third quarter, down from $5,074 in the second quarter.

Of particular note in the MBA report is that banks’ profits were down on a per loan basis, despite origination volume increasing in the third quarter.

According to the MBA report, banks’ average production volume was $437 million per company in the third quarter, up from  $378 million per company in the second quarter, which represents an increase of 16%. 

The higher average production volume is due to the average loan balance rising to the highest level the MBA has recorded in its Quarterly Mortgage Bankers Performance Report.

In the third quarter, the average loan balance was $231,914, up from $225,762 in the second quarter.

Perhaps driving the increase in average loan balance was the rise in the percentage of jumbo loans. In the third quarter, the jumbo share of total first mortgage originations rose to a record-high level of 9.4%, up from 7% in the second quarter, which was the previous record.

The purchase share of total originations, by dollar volume, was 72%, down from 74% in the second quarter. For the mortgage industry as a whole, MBA estimates the purchase share at 62% in the third quarter of 2014.

On a loan count basis, companies averaged 1,901 loans originated in the third quarter, up from 1,676 loans in the second quarter.

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