The mortgage market in 2019 was not simply more active than any year since 2006. It was hugely profitable for the industry as well.
The Mortgage Bankers Association (MBA) reported that independent mortgage banks (IMBs) and mortgage subsidiaries of charted banks quadrupled their profits in 2019 from 2018.
The industry averaged $1,470 of profit on each loan originated, according to MBA’s annual Mortgage Bankers Performance Report. That’s four times the $367 per loan the industry profited on in 2018.
“2019 was a much improved mortgage market compared to the very challenging environment for the industry in 2018,” MBA Vice President of Industry Analysis Marina Walsh said in a release accompanying the report. “After an unfavorable first quarter, independent mortgage companies saw significant improvement in profitability starting in the second quarter, driven by a jump in refinancing activity from the steady decline in mortgage rates. As volume escalated, production costs dropped from 2018 levels by $743 per loan.”
For the mortgage industry as whole, MBA estimates production volume was $2.17 trillion in 2019, up from $1.68 trillion in 2018. In terms of profitability, average production profit was 58 basis points in 2019, again up four times from 14 basis points in 2018. Since the inception of MBA’s report in 2008, net production income by year has averaged 50 basis points, or $1,057 per loan.
“For many IMBs, 2019 is now a distant memory because of the mortgage market disruption caused by the ongoing COVID-19 pandemic,” Walsh said. “The many pain points right now for IMBs include liquidity constraints, volatility in the secondary markets, capacity issues from heightened refinance activity, mortgage origination obstacles due to social distancing, and escalating forbearance activity. All of these challenges could factor into the future profitability of many IMBs.”
Walsh said companies with mortgage servicing rights were hit by the boom in refinances, as prepayment activity trigged heavy amortization and write-downs. She also indicated profits on the production side of the business generally compensated for servicing losses.
Including both production and servicing operations, 92 percent of the firms posted pre-tax net financial profits in 2019, compared with only 69 percent of firms in 2018.
Refinances grew to 34 percent of dollar volume, up from 20 percent a year earlier, and MBA estimates the industry as a whole saw a 41 percent share of refinance originations.
The average loan balance for first mortgages, meanwhile, reached a study-high of $266,533 in 2019, up from $251,084 in 2018. It marked the 10th consecutive year of rising loan balances on first mortgages.
In addition to driving revenues – production revenue rose to $9,004 per loan from $8,645 a loan in 2018 – the industry found ways to significantly drive down expenses.
Total loan production expenses – commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations – fell to $7,535 per loan in 2019 from $8,278 a year earlier. So as revenues rose 6.2 percent from a year earlier, expenses fell 9 percent.
Productivity also was on the rise, with IMBs originating 2.3 loans per production employee per month, up from 1.8 loans in 2018. The report counts production employees as sales, fulfillment and production support functions.
Of the firms reporting production for the report, 80 percent were IMBs and the rest were subsidiaries and other non-depository institutions.