Mortgage Profits Declined Sharply in 2006

October 10, 2007 No Comments »

According to an annual cost study conducted by the Mortgage Bankers Association, mortgage production profits fell from $258 a loan in 2005 to a loss of $50 per loan in 2006.

“Production profits began to slip in 2004, and we see a continuation of this trend in 2006,” said Marina Walsh, a senior director in MBA’s research and economics department.

Though production revenue increased on a per-loan basis, the increase was outpaced by production operating expenses which grew by 17% in 2006 to $3,416 per loan.

“Servicing profits in 2006 partially offset production losses, but even these profits declined from 2005 levels due to mortgage servicing hedge losses.”

The average mortgage lender posted pre-tax net income of $6.4 million in 2006, a huge decline from the $26 million in 2005.

“Despite some companies’ best efforts to boost production revenues through the origination of higher-yielding mortgage products, several factors worked against the industry as a whole – the negative yield curve which increased the cost of funds, lower sales productivity and higher per-loan sales and fulfillment costs, particularly personnel-related costs.”

Many lenders tried to stem declining mortgage volume by originating higher-risk, but more profitable mortgages such as subprime loans, though that seems to have backfired as evidenced by the recent surge in loan defaults.

The study also revealed that the average loan officer produced 62 loans in 2006, down from 83 in 2005, while the net “cost to originate” increased from $2,049 a loan in 2005 to $2,476 in 2006.

The “net cost to originate” includes all loan origination costs and commissions less fee income, but does not include secondary marketing gains, capitalized servicing, servicing released premiums and warehouse interest spread.

It should be extremely interesting to see the numbers for 2007, which are just beginning to unravel as large firms continue to announce (and revise) record losses.

The study is based on a sample of 189 mortgage banking companies who originated an estimated 54% of the total residential loan volume in 2006, and serviced 48% of outstanding mortgage debt.

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