Profits are at all-time highs across mortgage lending, and independent mortgage banks and mortgage subsidiaries of chartered banks reported their highest profits ever in 2020.
Independent mortgage banks, or IMBs, made an average profit of $4,202 on each loan they originated in 2020, up 185.85 percent from $1,470 per loan in 2019, according to the Mortgage Bankers Association’s Annual Mortgage Bankers Performance Report.
“2020 was a banner year for the mortgage industry, despite the COVID-19 global health crisis essentially shutting down the U.S. economy in March and forcing personnel into remote work environments,” said Marina Walsh, MBA vice president of industry analysis. “A surge in housing and mortgage demand, record-low mortgage rates, and widening credit spreads translated into soaring net production profits that reached their highest levels since the inception of MBA’s annual report in 2008.”
The 2020 Home Mortgage Disclosure Act data shows many lenders saw a surge in volume growth in 2020. One top 10 lender, Freedom Mortgage Corp. reported upward of 300 percent growth in 2020. The surge in mortgage demand was driven by ultra-low interest rates, pushing the top mortgage lenders’ growth higher.
The average production volume for IMBs was $4.5 billion per company in 2020, up from $2.7 billion per company in 2019. For the mortgage industry as whole, the MBA estimates production volume at $3.83 trillion in 2020 – the highest annual volume ever reported and up significantly from $2.25 trillion in 2019.
In an unusual twist, the driver of production profitability in 2020 was production revenue, led by strong secondary marketing gains, the MBA explained. Historically, production expenses drop when volume increases, but per-loan production expenses went up in 2020, as IMBs offered signing bonuses, incentives, overtime, and other compensation to address capacity constraints and meet mortgage demand. Furthermore, rising loan balances meant hefty sales commissions, often earned based on a percentage of the loan amount.
Mortgage servicing, however, did not see a profit surge in 2020 as the refi boom created an increase in early payoffs and widespread forbearance periods began. The refinancing share of total originations by dollar volume increased to 55 percent in 2020 from 34 percent in 2019.
“On the servicing side of the business, 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.”
Profits on the production side of the business generally compensated for the servicing losses. Including both production and servicing operations, 99 percent of the firms posted overall pre-tax net financial profits in 2020, compared to 92 percent of firms in 2019 and only 69 percent of firms in 2018.
“In early 2021, we are already seeing declines in pipeline volume – particularly refinance volume – as mortgage rates have risen in the first quarter,” Walsh said. “Also, secondary marketing income has dropped from last year’s highs, as credit spreads have tightened. Mortgage companies that can adjust quickly to changing market conditions and are able to harness still robust purchase demand are best poised for a successful 2021.”