It’s the ‘perfect storm:’ Average IMB lost $624 per loan in Q3

On average, IMBs originated $578 million from July to September, down from $705 million in Q2

The third quarter used to be historically the strongest of the year for independent mortgage banks (IMBs) and mortgage subsidiaries of chartered banks. 

At least until 2022. 

On the origination side, these companies’ costs exceeded $11,000 per loan for the first time, despite a reduction of 19% year over year for the total employees per firm, which contributed to the pre-tax net income in Q3 hitting its lowest level since 2008.

Overall, these companies reported a net loss of $624 on each loan they originated from July to September, much worse than the $82 loss in the second quarter and the $2,594 gain in Q3 2021, according to the Mortgage Bankers Association (MBA).

“The industry continues to struggle with a perfect storm of lower production volume and revenues and escalating production costs,” Marina Walsh, the trade organization’s vice president of industry analysis, said in a statement.

“Companies are responding to tough market conditions by reducing excess capacity, including staff. The number of production employees per firm is down 7% from the previous quarter and 19% from one year ago. However, overall volume has dropped so swiftly that some companies are having difficulties adjusting staffing and other costs to match market conditions,” Walsh said.

Production is currently in a free fall. On average, IMBs generated $578 million in origination volume from July to September, down from $705 million in the previous quarter. 

How are higher mortgage rates affecting servicing?

Acra Lending’s Eric Friedman said the servicing business right now is a “delicate balance between complying with regulations and servicing a loan for investors.” 

Presented by: Acra Lending

On a per-loan basis, production revenues declined from $10,855 in the second quarter to $10,392 in the third quarter.

Meanwhile, total loan production expenses – commissions, compensation, occupancy, equipment, and other expenses and corporate allocations – rose to a study high of $11,016 per loan in Q3, up from $10,937 per loan in Q2. 

The average loan balance for a first mortgage also fell to $335,940 in the third quarter, declining from $337,130 in the previous quarter. 

Purchase share of total originations by dollar volume among IMBs and mortgage subsidiaries of chartered banks jumped to 86% from the previous quarter’s 81%. The MBA estimates purchase mortgages made up 81% of the total loans for the industry in the third quarter.

Servicing business

Companies are continuing to benefit from their servicing activities in an environment of low delinquency rates and low prepayments. 

The servicing net financial income for the third quarter (without annualizing) registered a gain of $102 per loan in the third quarter, down from $133 per loan in the second quarter. 

Servicing operating income – which excludes MSR amortization, gains or loss in the valuation of servicing rights net of hedging gains or losses and gains or losses on the bulk sale of MSRs ­ – was $95 per loan in the third quarter, down from $97 per loan in the second quarter.

The sale of MSRs does not directly impact earnings as a revenue stream, but the conversion of MSRs into cash via sales deals bolsters a lender’s cash flow and overall liquidity.

Including production and servicing, 46% of the firms posted a pre-tax net financial profit in the third quarter, down from 57% in the previous three months. 

But, according to Walsh, “October’s report on slower inflation and the subsequent drop in mortgage rates could resuscitate purchase demand and ultimately provide some needed relief for the industry.”

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