Origination News Feature Story

MBA: Profit Per Loan Up

By Brian Collins

WASHINGTON-Reduced origination costs for mortgage bankers and (in some instances) a reduction in competition are helping residential lenders post their best per-loan profit margins in years, as shown by a sixfold increase in the first quarter.

Thanks to the Federal Reserve priming the liquidity pump and homeowners jumping at the chance to refinance into 30-year fixed-rate mortgages at a rate of 5% or better, loan applications are creating a deluge of business.

When several depositories - including the nation's largest mega-bank lenders - released their first-quarter earnings, they highlighted strong profits in their mortgage banking divisions. But now it's the nonbanks' turn to brag.

A survey by the Mortgage Bankers Association shows that small nondepository mortgage banking firms reaped a healthy profit of $1,088 per loan in the first quarter, compared to only $148 in the fourth quarter. "It was a needed boost for the mortgage industry," said Marina Walsh, MBA associate vice president of industry analysis.

Several lenders interviewed by this newspaper over the past few months said profit margins remained strong in the second quarter as well, though a chief concern continues to be a lack of available (and reasonably priced) warehouse lines.

The 319 mortgage banking companies that responded to the MBA survey - mostly independents that are not associated with depository institutions - had posted losses in 2006 and 2007. They eked out a small profit of $184 on each loan originated in the second half of last year but most of that income came in the fourth quarter.

The remarkable turnaround in profits, however, can be attributed to the Fed, which purchased $200 billion in agency mortgage-backed securities in the first quarter and pushed mortgage rates below 5%. Without such ultra low rates, surely, originations would not have boomed. The $8,000 first-time homebuyer tax credit also helped.

Average loan production per company jumped to $214 million in the first quarter, compared to $126 million in the fourth quarter, as refinancings swelled to 66% of production, MBA said. (According to the Quarterly Data Report, an Origination News publication, refis accounted for 77% of originations in the first quarter.)

Because originators have many fixed costs, the higher loan volume pushed down operating expenses. The "net cost to originate" fell to $1,725 per loan in the first quarter, down from $2,324 in the previous quarter.

The MBA survey also found that independents paid more for warehouse lines and turned them around in 14 days, as opposed to 18 days in the fourth quarter.

But even though the origination side of the mortgage business did well in the first quarter, the servicing side suffered somewhat thanks to rising delinquencies and rapid prepayments.

"The servicing shops of these independent mortgage companies and subsidiaries essentially broke even in the first quarter of 2009 with net financial losses of $1 per loan serviced," MBA noted.