Lenders are making more money on mortgages than they have in nearly 3 years

Profit per mortgage origination rises to highest level since 2016

Lenders reported making a profit on mortgages in the second quarter. In fact, according to a report released Thursday by the Mortgage Bankers Association, lenders made the highest profit per loan they’ve seen since 2016.

Independent mortgage banks and mortgage subsidiaries of chartered banks reported a profit of $1,675 on each loan the originated in the second quarter. This is up from a profit of just $285 per loan in the first quarter and the highest profit since the third quarter of 2016 when profits hit $1,773 per loan.

And it's a massive jump from the fourth quarter of last year, when lenders reported losing $200 on each loan they originated.

Earlier this month, Moody’s Investors Service explained that with interest rates down, lenders can expect to see demand spike for refinances and jumbo residential mortgages, and this will help boost profits.

The report from Moody’s revealed that banks reported a 0% net change in residential mortgage underwriting standards in the second quarter of 2019. And, with interest rates falling, it expects standards to “remain stable and possibly to tighten modestly.”

In the second quarter this year, the MBA explained that production volume rose even as expenses declined significantly. The decrease in production expenses, which was more than $1,500 per loan, was the largest quarterly decline since the inception of the study in 2008.

Total loan production expenses such as commissions, compensation, occupancy, equipment and other production expenses and corporate allocations, decreased to $7,725 per loan in the second quarter, down from a study high of $9,299 per loan in the first quarter.

“With anticipated increases in prepayment activity, we saw hits to servicing profitability resulting from mortgage servicing right markdowns and amortization,” said Marina Walsh, MBA vice president of industry analysis. “Nonetheless, the profitability on the production side of the business generally outweighed servicing losses.”

Back in June, mortgage lenders were finally feeling optimistic about the business, according to a Fannie Mae sentiment survey.

For the first time in nearly three years, senior execs at major lending institutions reported a positive outlook in net profit margins, with most citing increased consumer demand as the main reason, followed by operational efficiency.

Mortgage lenders have had a rough time after, in the beginning of 2018, lenders reported negative profits for the first time since Dodd-Frank compliance brought down profits in 2014. Before that, the only other quarter when lenders reported a negative profit margin was the first quarter of 2014, which saw a loss of $194 per loan as mortgage originators struggled to cope with compliance costs due to the recently passed Dodd-Frank reform.

The MBA study found that average pre-tax production profit rose to 64 basis points in the second quarter this year, up from an average net production profit of eight basis points in the first quarter.

Average production volume grew to $601 million per company in the second quarter, up from $385 million per company in the first quarter. Volume by count per company averaged 2,312 loans in the second quarter, up from 1,571 loans last quarter.

The purchase share of total originations, by dollar volume, decreased to 74% in the second quarter from 76% in the first quarter.

The average loan balance for first mortgages reached an all new high of $268,520 in the second quarter, up from $257,374 in the first quarter.

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