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MBA: The cost to produce a mortgage falls closer to historic lows

Independent mortgage bank production profitability improves

After a strong year in 2016, independent mortgage banks and mortgage subsidiaries of chartered banks recorded a slow start to the year. However, following seasonal norms, business started to pick up moving into the busy spring home buying season, the Mortgage Bankers Association's latest Quarterly Mortgage Bankers Performance report found. 

Record high mortgage expenses scarred the previous year despite revenues also reaching a record high. But even with the increase in mortgage expenses last year, it still proved to be a positive year for independent mortgage banks. MBA noted that average loan balances reached a study-high of $244,945 for first mortgages in 2016, which translated into higher revenues that reached a study-high $8,555 per loan in 2016.

This new report gives an update on the numbers, showing how 2017 is performing so far. This year shows a shift in the rise of expenses, with total production expenses starting to drop closer to historical norms.

“While profits were up in the second quarter compared to the first quarter of 2017, they lagged the second quarter profits of 2015 and 2016 given the movement away from refinances towards a purchase market,” said Marina Walsh, MBA’s vice president of industry analysis.

Overall, the report found that independent mortgage banks and mortgage subsidiaries of chartered banks reported a net gain of $1,122 on each loan they originated in the second quarter of 2017. This is significantly up from a reported gain of $224 per loan in the first quarter of 2017

“Production profitability improved in the second quarter as volume picked up with the spring home-buying season and a slight drop in mortgage rates,” said Walsh. “Production revenues declined due to increased competition, but that was more than offset by per loan expenses dropping to levels comparable with other recent quarters of similar volume.”

According to the report, total loan production expenses – commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations – decreased to $7,774 per loan in the second quarter of 2017. This is down from $8,887 in the first quarter of 2017.  

To put it in perspective, for the period from the third quarter 2008 to the present quarter, loan production expenses have averaged $6,035 per loan. 

Meanwhile, total production revenue (fee income, net secondary marking income and warehouse spread), which Walsh noted decreased, fell to 377 basis points in the second quarter of 2017, down from 395 basis points in the first quarter of 2017

On a per-loan basis, production revenues decreased to $8,896 per loan in the second quarter of 2017, from $9,111 per loan in the first quarter of 2017.

Other key metrics in the report include:

  • The average loan balance for first mortgages was $248,619 in the second quarter of 2017, up from $242,949 in the first quarter of 2017.
  • Average production volume was $526 million per company in the second quarter of 2017, up from $455 million per company in the first quarter of 2017. The volume by count per company averaged 2,177 loans in the second quarter of 2017, up from 1,944 loans in the first quarter of 2017.
  • The purchase share of total originations, by dollar volume, reached a study high of 76% in the second quarter of 2017, compared to 68% in the first quarter of 2017. For the mortgage industry as a whole, MBA estimates the purchase share at 68% in the second quarter of 2017.  

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