MBA Study Shows Mortgage Industry Production Profits Fell in 2006
|October 10, 2007
Mortgage banking production profits fell to negative $50 per loan in 2006 from positive $258 per loan in 2005, according to the Mortgage Bankers Association's (MBA) annual cost study. While production revenues increased on a per-loan basis, this increase did not keep pace with the increase in production operating expenses which grew by 17 percent to $3,416 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. "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. Servicing profits in 2006 partially offset production losses, but even these profits declined from 2005 levels due to mortgage servicing hedge losses.”
MBA's 2007 Cost Study is based on 2006 data and is the twenty ninth in an annual series of reports on the income and expenses associated with the origination and servicing of one- to four-unit residential mortgage loans by mortgage banking companies. The study is based on a sample of 189 mortgage banking companies who originate and service loans, and originated an estimated 54 percent of total residential volume in 2006 and serviced an estimated 48 percent of home mortgage debt outstanding.
Study highlights include:
- Overall, the average firm posted pre-tax net financial income of $6.4 million in 2006, compared to $26 million in 2005.
- Retail sales productivity averaged 62 loans per loan officer in 2006, compared to 83 loans per loan officer in 2005.
- On a per loan basis, the net "cost to originate" increased to $2,476 in 2006 compared to $2,049 per loan in 2005. The “net cost to originate” includes all origination operating costs and commissions minus all fee income, but excludes secondary marketing gains, capitalized servicing, servicing released premiums and warehouse interest spread.
- Net warehousing income, which represents the net interest spread between the mortgage rate on a loan and the interest rate paid on a warehouse line of credit, dropped to $245 per loan from $294 per loan in 2005 and $481 per loan in 2004, due to the flat yield curve.
- Net marketing income, which includes the gain or loss on the sale of loans in the secondary market, pricing subsidies and overages, as well as capitalized servicing and servicing released premiums, averaged $2,180 per loan in 2006 compared to $2,012 per loan in 2005.
- Servicing financial profits per loan serviced declined by 44 percent, primarily because of mortgage servicing hedge losses that were only partially offset by gains in servicing valuations. Per-loan financial profits averaged $58 per loan in 2006, down from $104 per loan in 2005.
- The largest servicers outperformed their smaller peers operationally, with the lowest cost to service and the highest direct servicing net income. However, these servicers also had the highest hedge losses which hurt their financial bottom line.
The data for this report was primarily derived from the Mortgage Bankers Financial Reporting Form (or "WebMB"), a multi-agency reporting form administered by MBA, Fannie Mae, Freddie Mac and Ginnie Mae.