High gains on sales drove record profits for mortgage bankers in 2020

Mortgage bankers had record origination profits last year, driven not by lower costs due to increased volume, but higher gains from selling loans in the secondary market, the Mortgage Bankers Association said.

But 2021 could be a different story as expected declines in origination volume are likely to create price competition as lenders look to maintain or increase market share.

Independent mortgage banks and bank mortgage subsidiaries earned an average profit of $4,202 per loan originated in 2020, up from $1,470 per loan in 2019, an increase of about 186%.

Gain-on-sales margins were abnormally high among the companies that disclosed this information, even despite some tightening throughout the year.

On the other hand, when volume increases, mortgage originators' expenses typically drop as a result. But the per-loan production expenses rose in 2020, because companies offered signing bonuses, incentives, overtime, and other compensation to address capacity constraints and meet demand, said Marina Walsh, the MBA's vice president of industry analysis, in a press release. Loan officers earned more in commissions since loan balances were higher.

Average production volume per company last year was $4.5 billion, up from $2.7 billion per company in 2019. The MBA's most recent estimate pegged last year's total volume at $3.83 trillion, an all-time high for the industry.

Net production income hit 157 basis points in 2020, compared with 58 basis points in 2019. In the first half of last year, net production income averaged 131 basis points, then rose to 174 basis points for the second half.

It is a big turnaround for an industry, which lost money per loan originated in two out of four quarters in 2018, and the full year's average per loan profit was just $367.

Total loan production expenses increased to $7,578 per loan in 2020, up from $7,535 in 2019.

Still, what IMBs earned on the origination side more than outweighed any losses their servicing units suffered.

"Heavy prepayments, combined with elevated default and forbearance activity, contributed to a loss of servicing income," Walsh said. "Valuation markdowns on mortgage servicing rights and servicing amortization resulted in heavy hits to the overall servicing bottom line, especially for those servicers that did not hedge their MSRs."

Servicers lost $176 per loan last year, compared with a $116 per loan loss in 2019.

All told, 99% of the companies that responded to the MBA's survey posted overall pre-tax net financial profits in 2020, compared to 92% in 2019 and 69% in 2018.

This year is shaping up to be a different story as Keefe, Bruyette & Woods expects mortgage banking profitability to moderate in the first quarter, relative to historically high levels reported the past two quarters, an earnings preview report from Bose George said.

He expects to see lower gain on sales results, much of that decline likely happening later in the period. And price wars could be on the horizon.

"Looking out toward the back half of this year and into next year, we are incorporating a compression in profitability to reflect a moderation in demand, which could lead originators to reduce pricing to better utilize their production capacity," George said. "With many non-bank lenders publicizing their objectives to take market share, we think it is possible that competition could drive profitability below long-term averages, though this should only be temporary."