The recent growth of independent mortgage bank profit hit a speed bump when mortgage interest rates started to steadily increase toward the end of 2016.
Now, the 30-year mortgage interest rate sits well above 4% and is not expected to stop increasing any time soon. And while higher interest rates mean more profit, it also means higher costs for potential homeowners — a possible disincentive to getting a mortgage.
But increasing interest rates are not necessarily all bad news for independent mortgage bank profit. But it isn't helping to stabilize profits, either.
According to the latest Mortgage Bankers Association Quarterly Mortgage Bankers Performance Report, independent mortgage banks and mortgage subsidiaries of chartered banks reported a net gain of $575 on each loan they originated in the fourth quarter of 2016, down from a reported gain of $1,773 per loan in the third quarter of 2016.
And while the third quarter of 2016 report posted a slight increase in profit, it is the second quarter of 2016 report that is most notable, which reported a net gain of $1,686 on each loan originated, drastically up from a gain of $825 per loan in the first quarter of 2016.
In this most recent report, independent mortgage banks had to deal with the positive and negative side effect of rising interest rates.
“Rapid increases in interest rates in the last two months of 2016 slowed mortgage activity in the fourth quarter, driving a significant decrease in loan production profits,” said MBA Vice President of Industry Analysis Marina Walsh.
The reported stated that average production volume came in at $690 million per company in the fourth quarter of 2016, down from $764 million per company in the third quarter of 2016. By count, the volume per company averaged 2,811 loans in the third quarter of 2016, down from 3,072 loans in the third quarter of 2016.
“Mortgage lenders reported a combination of both lower revenues and higher expenses. On the revenue side, secondary marketing income dropped as mortgage lenders wrestled with less favorable pricing and pipeline challenges. At the same time, production expenses per loan rose as fixed costs were spread over fewer loans,” said Walsh.
Total production revenue (fee income, net secondary marking income and warehouse spread) decreased to 347 basis points in the fourth quarter of 2016, down from 365 bps in the third quarter of 2016.
Broken down to a per-loan basis, production revenues decreased to $8,137 per loan in the fourth quarter of 2016, from $8,742 per loan in the third quarter of 2016.
On the other side, total loan production expenses – commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations – increased to $7,562 per loan in the fourth quarter of 2016. This is up from $6,969 in the third quarter of 2016. To help put this in perspective, for the period from the third quarter 2008 to the present quarter, loan production expenses have averaged $5,900 per loan.
As far as the positive side of rising interest rates, Walsh explained that those mortgage lenders with servicing portfolios benefited from higher net servicing financial income in the fourth quarter due to increases in the valuation of their mortgage servicing rights, driven by the same rising interest rates.
The report cited that net servicing financial income improved, with a year-to-date gain of $34 per loan in the fourth quarter of 2016 from a year-to-date loss of $122 per loan in the third quarter of 2016.
“However, the reduced profitability on the production side of the business generally outweighed servicing gains,” Walsh added.