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The cost of originating a mortgage just got ridiculous – again

Lenders go negative for first time since 2014

The cost of originating a mortgage hit all-time highs back in 2013 and 2014, but now, those costs are up once again and much like before, hitting all-new highs. 

Lenders continue to struggle in the rising mortgage rate environment, reporting negative profits for the first time since Dodd-Frank compliance brought down profits in 2014.

Back at the Mortgage Bankers Association’s National Secondary conference in New York City, MBA Chief Economist Mike Fratantoni predicted loan officers would report negative profits in the first quarter of 2018.

As it turns out, his prediction was correct.

Independent mortgage banks and mortgage subsidiaries of chartered banks reported a net loss of $118 per loan originated in the first quarter of 2018, according to the MBA’s Quarterly Mortgage Bankers Performance report. This is down from a gain of $237 per loan in the fourth quarter of 2017.

“In the first quarter of 2018, falling volume drove net production profitability into the red for only the second time since the inception of our report in the third quarter of 2008,” said Marina Walsh, MBA vice president of industry analysis. “While production revenues per loan actually increased in the first quarter, we also reached a study-high for total production expenses at $8,957 per loan, as volume dropped.”

“For mortgage bankers who held mortgage servicing rights, higher per-loan servicing revenues and gains on the valuation of servicing helped overall profitability,” Walsh said.

The only other quarter when lenders reported a negative profit margin, the first quarter of 2014, saw a loss of $194 per loan as mortgage originators struggled to cope with compliance costs due to the recently passed Dodd-Frank reform.

After drastically tumbling in the fourth quarter of 2013, profits in the first quarter of 2014 not only got worse for banker profits but also traveled into negative territory.

The average production volume decreased in the first quarter to about $450 million per company, down from $505 million in the fourth quarter. This came out to about 1,866 loans in the first quarter versus 2,059 loans in the fourth, the survey showed.

Working against lenders was the total loan production expenses such as commissions, compensation, occupancy, equipment and other production expenses and corporate allocations, which increased to a survey high in the first quarter. These expenses increased to $8,957 per loan in the first quarter, up from $8,475 per loan in the fourth quarter.

Historically, from 2008 to 2018, loan production expenses have averaged about $6,224 per loan.

Competition also continues to increase, and productivity decreased to 1.9 loans originated per production employee per month in the first quarter. This is down from 2 per employee in the fourth quarter.

Mortgage interest rates also continue to play a significant role in lender profits. At the Secondary conference in New York City, Fratantoni explained that as interest rates rise, refinances are falling. This is making lenders more vulnerable to seasonality changes as the home-buying fever dies down in the fall and winter months.

So what’s the solution? As of yet, there isn’t one. While the MBA expects lenders to report a profit for the full year 2018, increased seasonality could continue to be a growing problem for the foreseeable future.

Fratantoni suggested some lenders could start looking to seasonal hiring, but said right now there is no real solution.

Many lenders hope that utilizing digital mortgages will help cut back on costs as competition rises. Freddie Mac talks more about that in this podcast.

Even the largest mortgage lenders are struggling under the challenging environment. And Movement Mortgage recently announced it laid off 100 of its employees today across four locations as it faces lower originations and slower growth than it expected. This is the second time this year that Movement has trimmed its staff. Back in February, Movement laid off about 75 employees.

And Wells Fargo, the largest mortgage lender according to 2016 Home Mortgage Disclosure Act data, admitted its mortgage profits are struggling amid increased competition.

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