Mortgage bankers record largest average loss since 2008

The average mortgage banker's bottom line slipped further into the red than it's been since the Great Recession during the third quarter, as rates rose further, exerting more pressure on lending.

Companies generally took a loss of $624 per loan, or 20 basis points, during the quarter. This compared to a loss of $82 or 5 basis points in the second quarter and brought industry earnings to their lowest point since 2008, according to the Mortgage Bankers Association. That stands in stark contrast to a year ago, when the average independent mortgage banker generated $2,954 or 89 basis points of profit.

Marina Walsh, MBA's vice president of industry analysis, called the latest quarter's results "sobering news," given that the third quarter is generally the strongest of the year for the industry.

"The industry continues to struggle with a perfect storm of lower production volume and revenues and escalating production costs, which for the first time exceed $11,000 per loan," Walsh said in a press release.

Total production revenue fell on a consecutive-quarter basis and when compared to a year earlier at 326 basis points in the third quarter. It was 335 in the previous fiscal period and 396 between July and September last year. Expressed in dollars per loan, the equivalent figures were $10,392,  $10,855 and $11,734, respectively. The MBA includes fee income, net income from secondary marketing and the spread on warehouse financing that mortgage bankers obtain from other companies to fund their loans in this figure.

Net income from secondary marketing was 223 basis points during the third quarter, compared to 243 in the second and 310 a year earlier. Expressed in dollars per loan, mortgage bankers received $7,165 in net income from secondary marketing in the third quarter, compared to $7,939 in the second and $9,300 a year ago.

Thanks to low prepayments and delinquencies, the key determinant of which mortgage bankers remained profitable in the third quarter has been servicing, MBA found. Nearly half, or 46%, of all companies were profitable in the third quarter, down from 57% in the second. Without servicing, just 25% of mortgage bankers would have been profitable, according to the MBA. Cyclically, servicing generally tends to perform better when rates are rising and production volumes gain the upper hand when they fall.

Net financial income from servicing was slightly lower than the previous quarter but higher than a year ago at $102 per loan, compared to $133 and $37, respectively.

Operating income from servicing also was down from the previous quarter but up from a year earlier at $95, compared to $97 and $88, respectively. Amortization of mortgage servicing rights and gains or losses in the valuations of MSRs, net of the same from hedging, are excluded from operating income. The association also excludes gains or losses from bulk sales of MSRs from this figure.

Gains from servicing are diminishing, said Garth Graham, senior partner at the Stratmor Group, an industry consultancy.

"During the earlier quarter, some lenders were able to sell servicing from previous cycles and generate money that way. Now, most have sold that servicing or the market is not as robust for servicing assets," Graham said.

However, a couple of other developments suggest that lending numbers for mortgage bankers could be relatively stronger in the fourth quarter, according to the MBA.

"October's report on slower inflation and the subsequent drop in mortgage rates could resuscitate purchase demand and ultimately provide some needed relief for the industry," Walsh said.

Nevertheless, mortgage bankers could be in for another tough quarter, said David Hrobon, a principal at Stratmor.

"It is reasonable to expect that Q4 will be similar or worse than Q3," Hrobon said. "One thing that could help increase originations is a recession, due to lower rates. However, lower rates will drop MSR values."

Mortgage bankers have made some headway in readjusting the staffing levels in their lending units for lower volumes, but the process remains challenging.

Figures for production employees per firm are down 7% from the previous quarter and 19% from a year ago, according to Walsh.

"Lenders are cutting, but the cuts always lag the drops. It takes at least a month or two for cuts to show up, and many of the major cuts occurred in June when the rate really increased. Then another increase occurred in September, and those cuts have not shown up yet," Graham said.