Nonbank 4Q origination profits were at seven-year high: MBA
Independent mortgage bankers had their most profitable fourth quarter in seven years for originations, but the fallout from the coronavirus could upset the economics of the industry in the short term.
The average net gain on sale in the fourth quarter was $1,182 per loan, down from $1,924 in the third quarter, but up from a record net loss of $200 per loan on a year-over-year basis, according to the Mortgage Bankers Association.
"Typically, the second and third quarters perform better than the first and fourth quarters, and last year was no different," Marina Walsh, the MBA's vice president of industry analysis, said in a press release. "A combination of higher per-loan production expenses and lower secondary marketing income affected quarterly profitability. Firms added approximately 10% more employees last quarter, and slowing rate locks towards the end of the year led to less secondary marketing."
This was the most profitable fourth quarter for nonbanks since 2012. Mortgage bankers generated $800 million in production during the period, up from $781 million in the third quarter.
"With loan volume at elevated levels, independent mortgage bankers had a strong close to 2019. Net production profit was a healthy 46 basis points, up from the fourth quarter average of 35 basis points since the survey's inception in 2008," Walsh said.
Total production revenue, which consists of fee income, net secondary marking income and warehouse spread decreased to 337 bps in the fourth quarter, down from 349 bps in the third quarter. On a per-loan basis, production revenue decreased to $8,707 per loan in the fourth quarter, down from $9,142 per loan in the third quarter.
The net secondary marketing income was lower during the fourth quarter compared with the third quarter, at 263 bps or $6,848 per loan, versus 281 bps or $7,424 per loan.
Meanwhile, total production expenses (commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations) increased to $7,525 per loan in the fourth quarter, up from $7,217 in the third quarter.
When it came to servicing, the industry on average did not produce any net income, but did generate $44 of operating income per loan. In the third quarter, servicers averaged a net loss of $62 and operating income of $43 per loan. Operating income excludes servicing rights amortization, gains or losses in valuation and gains or losses from MSR bulk sales.
But the effect of the coronavirus on nonbank profits is unknown. Lenders have raised rates even as the benchmark 10-year Treasury declined, and some speculate that this reflects mortgage companies looking to take advantage of an opportunity to increase their gain-on-sale margin.
Meanwhile, MSRs are likely to be affected by higher defaults as borrower income has been impacted. In addition, many borrowers whose jobs were unaffected or have the ability to work from home are looking at refinancing, which also negatively influences MSR valuation.
"We continue to closely monitor how the fallout from the spread of the coronavirus will affect the various, important business functions of IMBs," said Walsh.