Cost reductions offset declining revenue
Independent mortgage banks (IMBs) and mortgage subsidiaries of chartered banks posted their second consecutive quarter of net production profits in the third quarter after two years of losses.
The Mortgage Bankers Association (MBA) reported that pre-tax profits reached $701 per loan, a slight increase from $693 in the previous quarter, as firms worked to balance rising costs and declining revenues.
“Mortgage companies reported net production profits for the second consecutive quarter after an unprecedented period of net production losses that spanned two years,” said Marina Walsh, MBA’s vice president of industry analysis. “Net production profits increased to 18 basis points last quarter – far improved from the average loss of 43 basis points the past two years – with a drop in secondary marketing income offset by a decrease in production expenses.”
The boost in production profits came primarily from a decrease in production expenses, which dropped to $10,716 per loan in Q3, down from $10,806 in Q2. This decrease helped offset declining revenues, which fell to $11,417 per loan from $11,499 in the previous quarter.
While production operations showed signs of resilience, the servicing side of the business faced headwinds. Higher prepayment rates led to mortgage servicing right (MSR) impairments, dragging servicing net financial income down to a loss of $25 per loan in Q3, compared to a $69 gain in Q2. However, servicing operating income, excluding MSR-related factors, rose slightly to $93 per loan, up from $88 in the previous quarter.
Read next: The election is done - what’s next for the housing market?
Loan production volume increased in Q3, averaging $542 million per company, up from $492 million in Q2. The average loan count rose to 1,642 loans per company, compared to 1,503 in the prior quarter. Purchase loans continued to dominate, accounting for 84% of total originations by dollar volume, while the average loan balance for first mortgages climbed to $361,518, up from $356,993 in Q2.
Despite the modest gains, fewer firms reported profitability in Q3 compared to Q2. About 71% of IMBs reported pre-tax financial profits across production and servicing operations, down from 78% in the previous quarter. The long-term average pre-tax production profit of 42 bps remains well above Q3’s 18 bps, according to MBA’s report.
Stay updated with the freshest mortgage news. Get exclusive interviews, breaking news, and industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
