Increased overhead to support back-office compliance is driving up origination expenses to the point that mortgage bankers lost nine basis points on the loan origination function during the first quarter, preliminary Mortgage Bankers Association data show.
That's on top of the record low production profit of $150 per loan the industry had for the fourth quarter of 2013.
"We're still going to sharpen our pencil on that, but no doubt it's going to be negative for the first quarter," MBA chief economist Michael Fratantoni told journalists Tuesday during the National Secondary Mortgage Market Conference in New York.
The losses are not a result of lenders aggressively pricing mortgages in order to make up for lower volume. Rather, it is due to higher expenses, especially because lenders have had to add back office staff to deal with new verification requirements put in place after the mortgage crisis.
Approximately 18 months ago, 60% of a typical lender's employee base was sales staff, with the remaining 40% providing support and fulfillment. Now those numbers are flipped.
"We can't identify a specific cause or regulation," for the change, Fratantoni says. But there is more of a focus from the Federal Housing Finance Agency regarding file verification. People are needed to do that function and that is what is showing up in the expense numbers.
"I think the question for the industry going forward is, is that increase in support personnel [and] that increase in expense on a per-loan basis going to be a permanent change in the landscape? Or is there going to be a way to bring down expenses again?" Fratantoni asks rhetorically, answering that the industry will have to find a way to reduce origination capacity, which will then allow for higher loan prices going forward.
There will be "lots of conversations about consolidation occurring, whether through acquisitions or some lenders just saying 'it's been a good run, it's time to hang it up,'" he says.
Consolidation in the industry is inevitable, Don Brown, president of Optimal Blue Secondary Services, said during a panel session later on Tuesday.
Companies can't expect to keep adding volume when overall industrial production keeps dropping. These firms have to start right-sizing themselves, Brown says.
Ken Logan, a managing director overseeing warehouse lending at Wells Fargo, adds he has had discussions over the past year with firms which had been originating mostly refinances. They expect to just move into the purchase business.
"Good luck with that," he says.
There are a lot of people looking to acquire companies. But the deals that have been done so far are between what both Brown and Logan termed as larger players merging with each other, rather than going after smaller firms. Buyers are placing little value on shops which only originate loans, Brown says.
"It will be harder to survive as a smaller net-worth mortgage banker, partially because of regulations and compliance," Brown says.
Firms are looking for either geographic diversity or diversity on the operational side, such as in the business niche, he says.
When asked about the pricing inversion between conforming mortgages and jumbo loans, Fratantoni points out among the reasons for the difference is the increase in guarantee fees from the agencies, as well as the loan level pricing adjustments that have been imposed.
"If I'm right and that's the major driver, if g-fees are more likely to go up than down from here, this is a new, regular part of the landscape," Fratantoni says.
It doesn't look like making it more expensive to do business with Fannie Mae and Freddie Mac has brought private capital into the market.
This is because it is a "tough competitive position to be in," to go against the government-sponsored enterprises. "Yes, there is an opportunity, but it's a quarter on the sidewalk and a steamroller is coming," Fratantoni says.