The net cost to originate a mortgage is growing and the profit from closing an origination is shrinking, despite growing loan balances and steady loan production.

The cost of originating a mortgage, which was once called ridiculous and astronomical, picked up in the second and third quarters of 2013, but now the business is starting to give back some of those gains.

Independent mortgage banks and mortgage subsidiaries of chartered banks reported a net gain of $744 on each loan they originated in the fourth quarter of 2014, well down from a reported gain of $897 per loan in the third quarter of 2014, the Mortgage Bankers Association reported today in its Quarterly Mortgage Bankers Performance Report.

Profit was up on a yearly basis despite being down in the quarterly measure.

The "net cost to originate" was $5,238 per loan in the fourth quarter of 2014, from $5,038 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.

Part of this is the total loan production expense has jumped from $6,769 to $7,000 from the third quarter. Production expense includes commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations.

“Production profits dropped slightly in the fourth quarter of 2014 compared to the third quarter of 2014. However, on a year-over-year basis, production profits were up,” said Marina Walsh, MBA’s Vice President of Industry Analysis. “In the fourth quarter of 2014, profits were $744 per loan (32 basis points), compared to $150 per loan (9 basis points) in the fourth quarter of 2013.”

Average production volume was $417 million per company in the fourth quarter of 2014, down from $437 million per company in the third quarter of 2014, but up from $367 million per company in the fourth quarter of 2013.

The volume by count per company averaged 1,769 loans in the fourth quarter of 2014, down from 1,901 loans in the third quarter of 2014 but up from 1,641 loans in the fourth quarter of 2013.

The purchase share of total originations, by dollar volume, was 65% in the fourth quarter of 2014, compared to 72% in the third quarter of 2014. For the mortgage industry as a whole, MBA estimates the purchase share at 54% in the fourth quarter of 2014.

Other findings include:

  • The jumbo share of total first mortgage originations was 8.44% in the fourth quarter compared to 9.42% in the third quarter.
  • The average loan balance for first mortgages grew to a study high of $233,655 in the fourth quarter of 2014, from $231,914 in the third quarter.
  • Secondary marketing income was 266 basis points in the fourth quarter of 2014, compared to 261 basis points in the third quarter.
  • Personnel expenses averaged $4,428 per loan in the fourth quarter of 2014, up slightly from $4,401 per loan in the third quarter.
  • Including all business lines, 74% of the firms in the study posted pre-tax net financial profits in the fourth quarter of 2014, down from 83% in the third quarter of 2014 but up from the 58% seen in the fourth quarter of 2013.