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Nonbank lenders profited $4,200 per loan in 2020

High demand, record low rates and widening credit translated to soaring net profits

Across the mortgage industry, revenues swelled to record highs in 2020. Nonbank lenders and mortgage subsidiaries of chartered banks reaped the rewards – they nearly tripled their profit per loan last year. According to recent data from the Mortgage Bankers Association, IMBs and mortgage subsidiaries averaged around $4,202 profit on each loan in 2020, compared to $1,470 per loan in 2019.

Marina Walsh, MBA’s vice president of industry analysis, noted that the pandemic-spurred surge in housing and mortgage demand, record-low mortgage rates and widening credit spreads translated into soaring net production profits that reached their highest levels since the inception of the MBA’s annual report in 2008.

Overall, the average production profit (net production income) was 157 basis points in 2020, compared to 58 basis points in 2019. In the first half of 2020, net production income averaged 131 basis points, then rose to 174 basis points in the second half of 2020. Since the MBA began tracking the stat in 2008, net production income by year has averaged 58 basis points ($1,299 per loan).

There was a downside to the heightened production revenue led by secondary market gains. Typically, when volume increases in the market, production expenses inversely drop. However, to keep up with the incredible level of demand, companies, notably the nonbank lenders, scrambled to add signing bonuses, incentives and overtime for workers, which in turn pushed production expenses up higher, the MBA said.

“On the servicing side of the business, heavy prepayments, combined with elevated default and forbearance activity, contributed to a loss of servicing income,” said Walsh. “Valuation markdowns on mortgage servicing rights and servicing amortization resulted in heavy hits to the overall servicing bottom line, especially for those servicers that did not hedge their MSRs.” 

But where servicing operations posted losses, originations picked up the slack. According to the MBA, for both production and servicing operations, 99% of the firms posted overall pre-tax net financial profits in 2020. That’s up from 92% in 2019 and just 69% in 2018.

“In early 2021, we are already seeing declines in pipeline volume – particularly refinance volume – as mortgage rates have risen in the first quarter,” Walsh said. “Also, secondary marketing income has dropped from last year’s highs, as credit spreads have tightened. Mortgage companies that can adjust quickly to changing market conditions and are able to harness still robust purchase demand are best poised for a successful 2021.”

By the end of 2020, the MBA reported refinances made up 67% of origination volume in the fourth quarter, however, that number is expected to drop significantly by the second quarter of 2021 – down to 46%. By the end of 2022, the MBA is putting refi’s at just 24% of origination volume which would be a hefty hit to the companies that made massive public debuts and hiring overhauls from heightened processing demand.

Zillow, though, is confident that the “great reshuffling” isn’t over just yet. The company’s most recent survey is expecting 2.5 million new households to enter the housing market in 2021.

But 2020 is going to be a tough year to beat, largely due to the dip in refis. According to the MBA, for the mortgage industry as whole, the company estimates production volume at $3.83 trillion in 2020 – the highest annual volume ever reported – up from $2.25 trillion in 2019. And average production volume was $4.5 billion (16,198 loans) per company in 2020, up from $2.7 billion (10,411 loans) per company in 2019.

Other noteworthy statistics from the MBA’s annual mortgage bankers performance report include:

  • The average loan balance for first mortgages reached a study-high of $278,725 in 2020, up from $266,533 in 2019. This is the 11th consecutive year of rising loan balances on first mortgages.
  • Total production revenues (fee income, net secondary marking income and warehouse spread) were 434 basis points in 2020, up from 356 bps in 2019. On a per-loan basis, production revenues were $11,780 per loan in 2020, up from $9,004 per loan in 2019.
  • Net servicing financial income, which includes net servicing operational income, as well as mortgage servicing right (MSR) amortization and gains and losses on MSR valuations, was at a loss of $176 per loan in 2020, down from a loss of $116 per loan in 2019.

Eighty-four percent of the 261 firms that reported production from nonbank lenders while the remaining 16% were subsidiaries and other non-depository institutions.

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