Excess workforce drove up loan production costs more than 20% last year

The swift pullback in borrower demand combined with a surplus of staff led nonbank lenders to post an average loss for each origination in 2022, according to a new report from the Mortgage Bankers Association. 

"For the first time since the inception of MBA's report in 2008, net production income was in the red in 2022, with losses averaging 13 basis points" said Marina Walsh, MBA's vice president of industry analysis, in a press release. Surging interest rates, which more than doubled in the 12-month period, combined with low inventory and limited affordability, led both purchases and refinances to plunge.

"The stellar profits of the previous two years dissipated because of the confluence of declining volume, lower revenues and higher costs per loan."

In dollar terms, the decline represented a fall into negative territory of $301 per loan, compared to an average net profit of $2,339, or 82 basis points, earned during 2021 when origination volumes accelerated to record highs, according to the trade group's annual mortgage banker's performance report. In 2020, profits clocked in even higher at $4,202, translating to 157 basis points per loan. 

Since the first publishing of the annual report, which includes data from independent mortgage banks and the home lending subsidiaries of chartered financial institutions, the average net profit per loan has been 55 basis points, representing a gain of $1,261.

At the end of 2022, mortgage application volumes sat more than two-thirds lower than levels from 12 months earlier, according to weekly industry surveys conducted by the MBA. Mortgage companies, seemingly caught off guard by the sudden change in fortunes, responded to the contraction with rounds of layoffs throughout most of the year, but the reduced headcounts came too late for most to return into the black. 

"Companies could not adjust their capacity fast enough. The number of production employees declined, but not at the same pace as origination volume," Walsh said. 

Average production volume per company came in 47% lower at $2.6 billion in 2022, down from $4.9 billion and $4.5 billion the previous two years, according to the report. 

Revenue, meanwhile, dropped to an average of $10,322 per loan in 2022 from $11,003 the previous year, and $11,780 in 2020, declines of approximately 6% and 12%, respectively.

While revenues dwindled, "the bigger story was that production expenses ballooned to a study high of $10,624 per loan," with the number representing an annual increase of 23% from $8,664 in 2021. Expenses include commissions, compensation, occupancy, equipment and other production and corporate allocations. 

The shortfall of new originations meant production employees were involved in closing an average of only 1.5 loans per month. By comparison, the rate of productivity came in at 2.5 loans per employee in 2021 and 3.3 in 2020. 

At its annual convention in October, MBA said the industry would need to reduce staffing by  another 25% to 30% in order for the industry to sufficiently rightsize itself for anticipated lower volumes. By the end of the calendar year, the number of employees employed at nonbank lenders had already shrunk by almost 12% from 401,200 to 354,000, according to the U.S. Bureau of Labor Statistics.

A retrenching of the mortgage market and heightened competition have also resulted in a spate of nonbank mergers and acquisitions over the past several months. On Friday, Homepoint Financial announced the offloading of its entire wholesale originations unit to The Loan Store, a mortgage enterprise based in Tucson, Arizona.

The bleak mortgage production news was somewhat tempered on the servicing side, though, where net income more than doubled for the year, the MBA said. Higher fees from increased loan balances, lower expenses as a result of a drop in serious delinquencies, as well as valuation mark-ups on servicing rights and slower prepayments all contributed to profits. 

Net financial income grew to $586 per serviced loan in 2022, up from $261 one year prior, representing a 125% increase. 

But when looking at mortgage operations as a whole, including both servicers and loan producers, only 32% of companies reported a profit, down from as much as 98% just two years earlier.

Despite some signs of an uptick in new originations in the first quarter and even the return of laid-off employees at some lenders, the MBA didn't back off its prediction of a challenging road ahead this year. 

"There is no denying the very difficult circumstances in which mortgage companies are still operating today. MBA's forecast calls for mortgage volume to decline again in 2023 before an expected rebound in 2024 and 2025," Walsh said.