Despite heavy refinancing volume in the fourth quarter, mortgage lenders faced operational cross currents that reduced their profits on every loan produced.
According to a new study from the Mortgage Bankers Association, these cross currents involved rising interest rates that tested the ability of independent (mostly nonbank) firms to hedge their pipelines.
The cost to originate a loan rose slightly in the fourth quarter, which is unusual when refinancings make up 63% of closings.
In addition, applications for loans were dropping during the quarter while the pull-through rate was 74%—higher than lenders anticipated.
Overall, per-loan profitability dropped to $1,082 in the fourth quarter from $1,423 the prior quarter, according to the trade group.
Marina Walsh, MBA’s associate vice president of industry analysis, noted that many applications taken in third quarter were scheduled to close in the fourth quarter.
Unless they were properly hedged, some mortgage bankers faced the dilemma of selling a low-yielding 4.5% loan into the secondary market when the expected yield had gone up to 5%.
Walsh noted that mortgage rates rose 55 basis points during the fourth quarter, including a 37 basis points surge during the month of December alone.
“Rising interest rates, particularly in the month of December, had an adverse impact on net gain on sale for many independent mortgage bankers,” Walsh said.
Her survey of 310 small mortgage shops found that secondary market income fell to $3,870 per loan in 4Q from $4,069 per loan in the third quarter.
The data for the Mortgage Bankers Performance Report comes from independent mortgage banking firms and subsidiaries of banks and thrifts. Roughly 70% of the 310 respondents are independent nonbanks.
The performance report also shows that the cost to originate a loan rose $100 from the third quarter to $2,827 in the fourth.
Historically, costs go down when there is a swing to refinancings, Walsh told National Mortgage News. “That is what we didn’t see this time,” she said.
Fortunately, the increase in loan production during the fourth quarter should make up for the lower per-loan profit.
The average respondent to the MBA’s survey originated $285.8 million in loans during the fourth quarter, compared to $237.4 million in the prior quarter. The MBA report shows 84% of the respondent firms posted pretax net financial profits in the fourth quarter, down from 88% in the prior quarter.
