Soaring production revenues have driven the quarterly result, erasing the rise in production expenses
Independent mortgage banks (IBMs) broke a record in the third quarter, posting a net production profit of $5,535 on each loan they originated, according to the Mortgage Bankers Association.
From the second quarter’s $4,548, net gains among IBMs and mortgage subsidiaries of chartered banks soared past 200 basis points to $5,535 per loan in the third quarter – a first for MBA’s quarterly Mortgage Bankers Performance Report which began in 2008.
Marina Walsh, vice president of industry analysis at MBA, said that the skyrocketing production revenues, which were led by strong secondary marketing increases, “drove these results and more than offset an increase in production expenses.”
Total loan production expenses – including commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations – increased up from $7,138 per loan in the second quarter to $7,452 per loan in the third quarter. From Q3 2008 to Q3 2020, loan production expenses have averaged $6,566 per loan.
“Production expenses usually drop with increased volume, as fixed costs are spread over more loans,” Walsh said. “But in the third quarter, costs rose despite the volume increase. One major reason for this increase was escalating personnel costs, including signing bonuses, incentives, overtime, and commissions that were pushed higher with the need and competition for workforce talent.”
A record 99% of production and servicing firms reported overall profitability in Q3 despite continued net servicing losses resulting from MSR impairment and amortization.
The average pre-tax production profit was 203 basis points (bps) in Q3, up from an average net production profit of 167 bps in Q2.
Average production volume was up from $1.02 billion per company in the second quarter to $1.34 billion per company in the third quarter. The volume by count per company averaged 4,732 loans in Q3, up from 3,631 loans the previous quarter.
Total production revenue – including fee income, net secondary marking income, and warehouse spread – jumped from 429 bps in Q2 to 475 bps in Q3. On a per-loan basis, production revenues rose from $11,686 per loan in Q2 to $12,987 per loan in Q3.
Personnel expenses increased in the third quarter, up from the average $4,992 per loan in the second quarter to $5,124 per loan.
Other key findings:
- Net secondary marketing income increased to 394 bps in the third quarter, up from 341 bps in the second quarter. On a per-loan basis, net secondary marketing income increased to $10,833 per loan in the third quarter from $9,355 per loan in the second quarter.
- The purchase share of total originations, by dollar volume, increased to 46% in the third quarter from 39% in the second quarter. For the mortgage industry as a whole, MBA estimates the purchase share was at 43% in this year’s third quarter.
- The average loan balance for first mortgages increased to a new study high of $282,659 in the third quarter, up from $282,309 in the second quarter.
- The average pull-through rate (loan closings to applications) was 72% in the third quarter, up from 71% in the second quarter.
- Productivity increased to 4.3 loans originated per production employee per month in the third quarter, up from 3.5 loans per production employee per month in the second quarter. Production employees include sales, fulfillment, and production support functions.
- Servicing net financial income for the third quarter (without annualizing) was at a loss of $30 per loan, compared to a loss of $68 per loan in the second quarter. Servicing operating income, which excludes MSR amortization, gains/loss in the valuation of servicing rights net of hedging gains/losses and gains/losses on the bulk sale of MSRs, was $26 per loan in the third quarter, up from $23 per loan in the second quarter.
- Including all business lines (both production and servicing), 99% of the firms in the study posted pre-tax net financial profits in the third quarter, up from 96% in the second quarter.
