Mortgage bankers had a record loss on originations in 4Q

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Independent mortgage bankers lost the largest amount for originating a loan in the fourth quarter since this data has been tracked, as costs rose and volume dropped, according to the Mortgage Bankers Association.

"Independent mortgage bankers continued to struggle in this very competitive mortgage market environment, with the average pretax net production income per loan reaching its lowest level since the inception of our report in 2008," Marina Walsh, the MBA's vice president of industry analysis, said in a press release. "Among the headwinds for mortgage bankers were lower volume, lower revenues and higher costs relative to the previous quarter."

The mortgage industry needs to realize that it must optimize their operations around an originations market that will be $200 billion to $300 billion, said consultant Christopher Whalen in an interview. Originators need to "right size the business now, look at revenue now and do what you have to do to make your business work."

"Don't sit there and wait and keep your overhead 10% or 15% higher than you can really justify. You've got to cut it now," he said.

There was an average net loss of $200 per loan originated in the quarter, compared with an average profit of $480 per loan in the third quarter. For the fourth quarter of 2017, they had an average net gain of $237 per loan.

While average total production revenue was $8,411 per loan, the average total expense was $8,611. Average net secondary marketing income, a component of production revenue, fell to $6,466 per loan from $6,802 in the third quarter.

On a pretax basis, the average loss in the fourth quarter was 11 basis points, compared with an average profit of 20 bps in the third quarter and 9 bps in the fourth quarter of 2017.

It wasn't just independent mortgage bankers that lost money on production. JPMorgan Chase lost $28 million on originations in the fourth quarter.

This is only the third time ever and the second period in 2018 that the independent mortgage banking industry lost money on production.

In the first quarter last year, independent mortgage bankers had an average net production loss of $118 per loan; in the first quarter of 2014 the average net production loss was $194 per loan.

Average production volume was $440 million per company in the fourth quarter, down from $474 million in the third quarter.

"On the servicing side of the business, mortgage servicing rights impairments resulting from December's drop in interest rates hurt profitability," Walsh said. "Including all business lines (both production and servicing), only 44% of the firms in the study posted a pretax net financial profit in the fourth quarter."

In the third quarter, 71% of independent mortgage bankers had a pretax profit.