Small mortgage banking companies got crushed in the first quarter between falling loan volumes and rising expenses.
Profits per loan dropped 66% as the tail end of the fourth-quarter refinancing boom came to an abrupt end in late January and managers rushed to cut payroll and other expenses.
Average per-loan profit was $346 in the first quarter, according to a survey by the Mortgage Bankers Association, down from a $1,082 profit in the fourth quarter.
Meanwhile, expenses per loan rose from $4,930 in the fourth quarter to $5,837—which ate into first-quarter profits, according to Marina Walsh, MBA's associate vice president of industry analysis.
Walsh started the quarterly profitability survey for MBA in 2008.
The MBA survey of independent mortgage banks and subsidiaries of banks and thrifts found 63% of the 329 respondent firms posted pretax profits for the first quarter, compared to 84% in the prior quarter.
It is not unusual for profits to take a hit at the end of the refinancing boom.
However, it appears this downturn in profitability was more severe due to regulatory costs associated with loan officer compensation and overtime rules.
Walsh pointed out that the first quarter of 2010 had a lot of similarities to the first quarter of this year.
Loan production was nearly the same at $157,800 and refinancing volume was 44% in the first quarter of 2010. Refinancings in the first quarter of 2011 comprised 50% of originations.
Yet the average per-loan profit was $608 in the 2010 first quarter, compared to $346 in the first quarter of this year.
One important difference may be new regulations. Lenders implemented Department of Labor rules that require overtime pay for certain loan officers. Implementation of this DOL rule occurred in the fourth and first quarters.
In addition, lenders had to implement the Federal Reserve Board's loan officer compensation rule by the first week of April.
"In the first quarter of 2011, changes in compensation plans…likely drove up loan production expenses," Walsh said.
Another difference between the first quarter of 2010 and 2011 is the increased prevalence of investor overlays.
"All the investor overlays are pretty expensive," Walsh said. And despite technology, every investor's overlays are a little different, which adds to costs.
