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Mortgage

Profit margin decline suggests mortgage bonanza is waning

Production is down and so are profits despite strong Q1

Independent mortgage banks (IMB) and mortgage subsidiaries of chartered banks saw an average net profit of $3,361 on each loan they originated in the first quarter of 2021, down from a reported gain of $3,738 per loan in the fourth quarter of 2020, according to a new report from the Mortgage Bankers Association.

The average pre-tax production profit was 124 basis points, down from an average net production profit of 137 bps in the fourth quarter of 2020, but up on a yearly basis from the 61 basis points average in the first quarter of 2020.

Historically speaking, the average quarterly pre-tax production profit, from the third quarter of 2008 to the most recent quarter, is 55 basis points.

Production revenues dropped for the second consecutive quarter, though the pace of production expenses flattened from the previous two quarters, said Marina Walsh, the MBA’s vice president of industry analysis.

“Despite dropping slightly from the fourth quarter of 2020, net production profits reached their highest level for any first quarter since the inception of MBA’s report in 2008,” said Walsh. “Triple-digit basis-point profitability was seen for the fourth consecutive quarter, which is another record that surpasses the 2012 boom generated from the Home Affordable Refinance Program.”


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Join us for this webinar as executives from Mortgage Coach, Total Expert, Sales Boomerang and American Pacific Mortgage provide strategies to identify leads, retain borrowers, increase LO efficiencies, and maximize profit despite narrow mortgage margins.


Despite the slightly skinnier wallets, 97% of firms posted overall profitability for the first quarter of 2021. 

The average IMB generated $1.44 billion in origination volume in the first quarter, down from $1.47 billion sequentially. Total production revenue for IMBs, which includes fee income, net secondary marking income and warehouse spread, decreased to 408 basis points in the first quarter, down from 421 basis points in the fourth quarter of 2020. On a per-loan basis, production revenues decreased to $11,325 per loan in the first quarter, down from $11,676 per loan in the fourth quarter of 2020.

Walsh’s research found that the average loan balance for first mortgages increased to a new study high of $288,551 in the first quarter, up from $287,131 in the fourth quarter of 2020. The purchase share of total originations, by dollar volume, decreased to 39% in the first quarter from 43% in the fourth quarter.

Walsh pointed to “substantial improvements” in net servicing financial profits, thanks to a recovery in the valuation of mortgage servicing rights (MSRs).

Prior to the pandemic, servicing net financial income for the fourth quarter of 2019 (without annualizing) was at $0 per loan. The first quarter experienced a sharp loss of $171 per loan, but that number fell back down to a loss of $68 per loan in the second quarter of 2020, according to the report.

Here are more pertinent statistics from the MBA’s quarterly mortgage bankers performance report:

  • Net secondary marketing income decreased to 331 basis points in the first quarter, down from 346 basis points in the fourth quarter. On a per-loan basis, net secondary marketing income decreased to $9,283 per loan in the first quarter from $9,655 per loan in the fourth quarter.
  • The average pull-through rate (loan closings to applications) was 76% in the first quarter, down from 78% in the fourth quarter.
  • Total loan production expenses – commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations – increased to $7,964 per loan in the first quarter, up from $7,938 per loan in the fourth quarter. From the third quarter of 2008 to last quarter, loan production expenses have averaged $6,621 per loan.
  • Personnel expenses averaged $5,523 per loan in the first quarter, up from $5,426 per loan in the fourth quarter.
  • Productivity decreased to 3.6 loans originated per production employee per month in the first quarter from 4.2 loans per production employee per month in the fourth quarter of last year. Production employees includes sales, fulfillment, and production support functions.
  • Servicing net financial income for the first quarter (without annualizing) was at $154 per loan, compared to $5 per loan in the fourth quarter.

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