Independent mortgage banks turn high profits, head into uncertain time

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Independent mortgage banks and mortgage subsidiaries of chartered banks posted net gains over $1,000 per loan for the fourth straight quarter, according to the Mortgage Bankers Association.

IMBs realized $1,600 per loan in the first quarter of 2020, improvements from $1,182 in the fourth quarter of 2019 and $285 in the first quarter of 2019. Historically, profits run highest during the second and third quarters.

"Mortgage production profits were strong in the first three months of 2020, despite a decline in production volume from the fourth quarter and March's severe market volatility sparked by the COVID-19 pandemic," Marina Walsh, the MBA's vice president of industry analysis, said in a press release. "As credit spreads widened, revenues grew by 25 basis points from the fourth quarter, offsetting a reported increase in expenses."

The MBA's Quarterly Mortgage Bankers Performance Report showed that pretax production profit reached 61 basis points in the year's opening frame, up from an average net production of 46 basis points in the fourth quarter and 7 basis points the year before.

"Overall, it was a solid showing for independent mortgage banks — particularly for a first quarter — with 78% reporting profitability across production and servicing operations, compared to 84% in the fourth quarter," said Walsh.

But mortgage activity lagged as overall production volume fell from the end of 2019.

Average production volume dipped to $728 million per company from the fourth quarter's $800 million, but it was nearly double from $385 million a year ago. Similarly, volume by loan count averaged 2,654 per company, down from 2,947 quarter-over-quarter, but up from 1,571 the year before.

On the contrary, total production revenue increased to 362 basis points from 337 basis points in the fourth quarter while falling from 393 basis points year-over-year. Production revenue per loan spiked to $9,582 from $8,707 in 4Q19 and $9,584 in 1Q19.

As the coronavirus made its impact in this quarter, higher prepayment activity and delinquencies affected mortgage servicing rights. Net servicing income fell to a loss of $171 per loan serviced in the first quarter, from $0 in the fourth quarter.

But with the current civil unrest paired with the economic and pandemic uncertainties, it's nearly impossible to see what's coming. Profitability forecasts are foggy at best.

"You can quote me as saying, I have no f------ idea," Joe Garrett, principal at Garrett, McAuley & Co, said in an interview. "Anybody who knows where they're headed should not be listened to."

Interest rates are the biggest driver of mortgage revenue because they drive loan volume the most. Rates and volume are joined at the hip, according to Garrett. But with the major surge of refis already passed, volume may stay static even with rates sitting at all-time lows.

"If I had to guess what'll happen over the next six to nine months, everyone who wanted to refinance will have one if rates stay the same," Garrett said. "I don't think there'll be a big change in loan volume."

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