Mortgage Originations, Profitability on the Rise

Written By: Joel Palmer, Op-Ed Writer

The strong housing market is helping to keep the U.S. economy from slowing down and leading to increasing profits for the mortgage industry, according to reports.

According to Freddie Mac’s August Forecast, low mortgage rates and a strong labor market will boost the housing market for the rest of this year and into next year.

Freddie’s report also suggested that these factors may lessen the possibility or impact of an economic recession.

“Going forward, the combination of low mortgage rates, a tight labor market, and strong consumer confidence will offset declining business sentiment,” read the report.

In its report, Freddie Mac also forecasted:

•2.2 percent GDP growth for the full year. The report said that trade tensions will have an impact on the second half of the year.

•30-year fixed mortgage rates to remain around 3.6 percent through the second quarter of 2020. This is due to downward pressure on global long-term interest rates.

•Home sales to be 5.94 million in 2019 6.04 million in 2020, as well as an increase in housing starts next year.

•Higher annual mortgage origination levels of $2 trillion and $1.8 trillion in 2019 and 2020, respectively.

In addition to helping the economy, the current housing market helped the mortgage industry record its highest profit level in nearly three years.

According to the Mortgage Bankers Association, mortgage originators reported a net gain of $1,675 on each loan originated in the second quarter of 2019. That was up from $285 per loan in the first quarter of the year.

"Production profits in the second quarter of 2019 were the best MBA has seen since the third quarter of 2016 ($1,773 per loan), as production volume rose and expenses declined significantly," said Marina Walsh, MBA's Vice President of Industry Analysis. "In fact, the drop in production expenses, by over $1,500 per loan, was the largest quarterly decline reported since the inception of this study in 2008." 

Added Walsh, "With anticipated increases in prepayment activity, we saw hits to servicing profitability resulting from mortgage servicing right (MSR) markdowns and amortization. Nonetheless, the profitability on the production side of the business generally outweighed servicing losses."

Key findings of MBA's second quarter of 2019 Quarterly Mortgage Bankers Performance Report include:

•Average production volume was $601 million per company in the second quarter, up from $385 million per company in the first quarter.

•Total production revenue (fee income, net secondary marking income and warehouse spread) decreased to 370 bps in the second quarter, down from 393 bps in the first quarter. On a per-loan basis, production revenues decreased to $9,400 per loan in the second quarter, down from a study high of $9,584 per loan in the first quarter.

•The purchase share of total originations, by dollar volume, decreased to 74 percent in the second quarter from 76 percent in the first quarter. For the mortgage industry as a whole, MBA estimates the purchase share was at 71 percent last quarter.

•The average pull-through rate (loan closings to applications) was 70 percent in the second quarter, up from 69 percent in the first quarter.

•Total loan production expenses - commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations - decreased to $7,725 per loan in the second quarter, down from a study high of $9,299 per loan in the first quarter. From the third quarter of 2008 to last quarter, loan production expenses have averaged $6,465 per loan.

•Productivity increased to 2.3 loans originated per production employee per month in the second quarter, up from 1.8 loans per production employee per month in the first quarter. Production employees includes sales, fulfillment and production support functions.

About the Author

As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.

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