Mortgage bankers lost an average of $50 for each loan they originated in 2006, as they failed to cut costs and match staffing to match declining originations, a new study by the Mortgage Bankers Association reveals.
The MBA’s annual cost study, which surveys of a sample of 189 mortgage banking companies, said production profits plummeted from $1,272 per loan in 2003 to $258 in 2005, before dipping into negative territory last year.
During that period, loan officer productivity fell from 141 retail loans closed per year in 2003 to an average of 62 in 2006. That helped push the net cost of originating a loan from $739 in 2003 to $2,746 last year, the study found.
“The continued increase in production operating expenses is an indication of the difficulty in matching costs, particularly personnel costs, with declining volumes,” the study concluded.
After peaking in 2003 at $3.8 trillion, purchase and refinance mortgage originations declined to $2.8 trillion in 2006, the MBA said.
Overall, the average firm posted pre-tax net financial income of $6.4 million in 2006, compared with $26 million in 2005, the survey found. The 189 lenders represented in the survey’s sample originated $1.5 trillion in loans in 2006, or 54 percent of all residential loans.
Although lenders surveyed said they boosted profits on the sale of loans and mortgage-backed securities (MBS) in the secondary market — to $2,180 per loan in 2006, compared with $1,528 in 2003 — those gains weren’t enough to offset their increased expenses.
While gains on secondary market sales were headed up, net warehousing income was falling, thanks to smaller spreads between the interest rate on a mortgage loan and the interest rate lenders pay on warehouse lines of credit. In 2003, lenders surveyed reported making $516 per loan through warehousing income, compared with $245 per loan in 2006.
Net servicing income averaged $58 per loan in 2006, down from $104 the year before but up from a loss of $166 per loan in 2003. The direct cost to service each loan in 2006 was $83, up from $73 the year before but essentially unchanged from $86 in 2003.
Lenders surveyed said that on average they were able to service 1,207 loans per full-time employee, down from 1,330 in 2005 but up from 1,027 in 2003.
Lenders servicing more than 50,000 loans spent only $81 per loan serviced, compared with $153 per loan for those servicing 5,000 to 49,999 loans. For lenders with 500 to 1,999 loans, the cost of servicing each loan rose to $427.
The survey found that in 2006, the average mortgage banking company originated 42,987 loans valued at $8 billion, with average loan balances rising 5 percent from 2005 to $228,891.
While larger lenders enjoyed economy-of-scale advantages over smaller competitors, they were also more likely to have mortgage servicing rights hedging losses, the study noted.
“Despite some companies’ best efforts to boost production revenues through the origination of higher-yielding mortgage products, several factors worked against the industry as a whole,” said MBA researcher Marina Walsh in a statement accompanying the release of the study.
Those factors included a negative yield curve that increased the cost of funds, lower sales productivity, and higher per-loan sales and fulfillment costs, particularly personnel-related costs, Walsh said.
