Large banks hemorrhaged money on mortgage originations in 2018

Large banks had huge losses from originating mortgages in 2018 as costs were three times higher than similar-sized independent lenders, according to research conducted by Stratmor and the Mortgage Bankers Association.

Financial institutions typically lag the competition when reacting to the cyclicality of the mortgage marketplace and it affected their bottom lines as a result. Large banks lost an average of $4,803 for every retail mortgage originated in 2018, a sharp downgrade from the $2,659 per loan loss in 2017 and $850 per loan loss of 2016.

"When our industry becomes dominated by purchase money mortgages, the large banks' natural advantage in terms of new loan opportunities dissipates," Tom Finnegan, principal at Stratmor, said in the June Insight Report.

Large independent mortgage bankers' profits swung downward in that time frame as well, but they still made money on average. In 2018, large IMBs took in an average of $376 per loan in their retail channel, down from $600 in 2017 and $975 in 2016.

"Unfortunately, the trends we noted in our large bank group were consistent with what Stratmor has found across many of our large bank clients: low revenues, high expenses and trend lines that are moving in the wrong direction," Finnegan said.

Corporate administration costs are a major disadvantage for the banks. These costs averaged $3,654 per loan in 2018, almost exactly three times the amount of the costs for large independents. Another disadvantage for banks was moving away from Federal Housing Administration lending to avoid the risk of regulatory enforcement.

"Portfolio loans, and jumbo loans specifically, are being priced aggressively by the banks, leading to imputed revenue that is lower than might be expected otherwise," Finnegan said. "Because FHA and VA loans typically offer the ability to price with wider margins, not participating in this loan segment can also contribute to lower per loan revenue."