2018 will test mortgage bankers, but survival will pay off

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Originations and margins are thinning, and there will be mortgage banking firms that don't make it through this year, but after that, the numbers may look better.

"What a tough business this is right now. Margins are just incredibly tight," Mortgage Bankers Association Chief Economist Mike Fratantoni said during a press briefing at the group's secondary market conference in New York.

When the MBA finishes crunching first-quarter net income numbers, the results will likely be a dip into negative territory for the first time since 1Q 2014, he said.

That's in part because the industry has undergone shifts in origination volume it hasn't yet finished adjusting capacity for, as well as the fact per-loan expenses remain high.

Also, with originations more driven by peak buying seasons in the housing market due to the decline in refinancing, weakness in first- and fourth-quarter volume could be more pronounced, Fratantoni noted in a separate outlook session at the conference.

During the first and fourth quarter of last year, for example, mortgage bankers' net production income was in the 9-10 basis point range, but during the second and third quarters it exceeded 40 basis points.

If the industry gets to a point where there has been enough downsizing in the industry to bring the scope of operations in line with the realities of the market, margins could improve.

In the meantime, mortgage bankers have a rough patch to get through, and strategies they may turn to in order to do it range from selling servicing rights to their loans to raise cash, to exiting nonessential business lines to cut costs. This could include exits from loan channels, Fratantoni said during the press briefing.

A greater percentage of lenders appear to be selling their servicing rights from loans sold to the government-sponsored enterprises than from loans pooled for Ginnie Mae securitizations, reflecting what continues to be a stronger market for agency servicing than for government servicing.

On average, almost 24% of the dollar volume of loans produced by independent mortgage bankers was servicing-retained production, according to a sample analyzed by the MBA. But the average for mortgage bankers that were primarily government lenders was more than 30%, Fratantoni said during the outlook session.

The MBA left its outlook for originations largely unchanged from last month at $1.613 trillion for 2018, down from $1.71 trillion for 2017. But purchase originations could rise to $1.167 billion in 2018 from $1.11 billion in 2017, according to the association's forecast.

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Secondary market Purchase Refinance Nonbank Mortgage Bankers Association