Overall pre-tax production margins for mortgage banking companies declined by 40 percent during the first half of 2004, according to figures from the latest peer group survey and roundtables conducted by the Mortgage Bankers Association and the STRATMOR Group.
While the Peer Group Study results were lower than the record-breaking profit levels in 2003, most companies in the study were solidly profitable. Average pre-tax production margins fell to 54 basis points during the first six months of 2004, down from an all-time high of 90 basis points in 2003 (i.e., 0.9 percent of the principal balance of loans produced). Driving this decline was lower origination volume, which in turn resulted in higher origination costs.
The average firm in the study experienced origination declines of 20 percent, primarily in rate/term refinances. As fewer loans were produced, average production and support expenses increased to 154 bps in 2004 from 132 bps in 2003. At the same time, pricing pressures emerged in 2004, and average production revenues declined to 208 bps in 2004 from 222 bps in 2003. The average profit margins for retail production channel showed the most dramatic change, dropping by more than 50 percent. The average retail profit margin declined to 42 bps in the first half of 2004 from 100 bps in 2003. This translates into pre-tax net income of $760 per loan (annualized) in 2004 compared with $1,555 per loan in 2003. While retail revenues were flat in 2003 and 2004, the cost-to-produce (fully loaded) increased by 26 percent to $3,766 per loan. Adjustments in fixed retail costs have traditionally lagged reductions in volume.
Productivity for retail loan officers also declined, moving to 79 loans originated per officer from 113 loans originated per officer the prior year. Other production channels – broker/wholesale; correspondent; and direct marketing – also experienced declines in 2004 but to a lesser extent. The direct marketing channel, traditionally a portfolio retention channel, showed resilience with net production margins of 124 bps in 2004 from 174 bps in 2003.
The average broker production margins were 47 bps in 2004 from 65 bps in 2003, while the average correspondent production margins were 43 bps in 2004 from 69 bps in 2003. On the servicing side, with reduced refinancing activity and fewer loan set-ups and payoffs, the net servicing financial income for the average firm rose to $24 per loan (annualized) in 2004 from a loss of $107 per loan in 2003. The improvement was primarily due to recovery of previously recorded mortgage servicing rights impairment net of hedging losses. In addition, increases in per-loan servicing fees driven by higher loan balances improved margins. A third factor contributing to improved margins was the decline in direct servicing expense to $98 per loan (annualized) from $104 per loan in 2004.
The MBA/STRATMOR Peer Group Survey is completed by a broad cross section of mortgage lenders, including big bank subsidiaries, large and small mortgage banking companies, and thrifts.
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