Cash-strapped mortgage banks just can't catch a break
If falling volume and rising costs weren't bad enough for nonbank mortgage lenders, an extended run of tight gain-on-sale margins is further eating into their profits.
The profit lenders earn when they sell loans to investors is shrinking at an alarming rate and exacerbating an already challenging market for small and medium mortgage banks, according to data from Richey May.
"It's very unusual to see that last for six consecutive quarters," Tyler House, manager of advisory services at Richey May, said in an interview.
All told, per-loan net production income at small nonbank lenders is down 67% through September, compared to a year ago. Lenders averaged just $337 in profit per loan this year, compared to $1,011 a year ago, according to data from the Englewood, Colo.-based accounting and advisory firm.
One possible reason lenders' gain-on-sale isn't growing in line with rising mortgage rates is that investors aren't paying more for loans — and pocketing the extra interest income themselves.
But the opposite could also be happening. Lenders may be taking a haircut on the rates they offer borrowers to better compete for business. If that's the case, lenders may want to consider "not simply pricing loans away to get volume up," House said.
Mortgage lenders are quick to blame their thin margins on higher interest rates and home prices that have made it difficult to originate loans. But so far this year, the average dollar volume of nonbank originations hasn't remained relatively stable compared to a year ago, Richey May's data suggests.
While the average loan count is 2% lower, a 3% increase in average loan size has left the dollar volume of loans produced in the first nine months of this year in almost the same position as the first three quarters of 2017.
That said, loan volume is likely to be under more pressure going forward due to the seasonal slowdown that typically occurs in the fourth quarter.