Mortgage profits per loan hit a record high in Q3 2020
Lender money on every home loan hit a new survey record in the third quarter despite increased spending that put downward pressure on margins, according to the Mortgage Bankers Association.
The average pre-tax production profit of independent mortgage companies and mortgage subsidiaries of chartered banks was 203 basis points of the equity balance of each unit created during the period. This translates into a net income of $ 5,535 per loan.
In comparison, there were 73.8 basis points of profit or $ 1,924 of net income on every mortgage created in the third quarter of last year, and 167 basis points of profit or $ 4,548 of net income each. other products in the second quarter of this year.
Spending per loan in the third quarter of this year was $ 7,452 on average, compared to $ 7,217 in the same period last year and $ 6,566 in the second quarter of 2020.
Despite the economies of scale that come with high volumes, costs rise as mortgage companies pay a lot to recruit enough new employees to keep up with the flood of incoming loans.
“Production expenses generally decrease with increasing volume, as fixed costs are spread over more loans. But in the third quarter, costs increased despite increased volumes. One of the main reasons for this increase was escalating personnel costs, ”Marina Walsh, vice president of industry analysis for the MBA, said in a press release.
While the rising costs will not immediately hurt mortgage companies, as they are more than offset by income from a heavily rate-driven refinancing, the industry generally expects that the more the The refi boom is prolonged, the greater the risk of downward pressure on there will be margins.
“It’s the normal cycle you’d expect to see in the industry when there are these big waves of refi,” said Nathan Lee, partner at Richey May consulting firm. “When the refit boom continues, rates start to rise and refits start to slow down, even a little, and then the mortgage companies start to compete with each other. They say, “We are going to reduce our margin and we are going to reduce our prices so that we can continue to increase the volume. “
Margins could also decline due to the 50 basis point fee on refinancing that government-sponsored companies imposed this month. There is some hope that the new Biden administration will reconsider these fees given his interest in promoting affordable housing. But even if it does, forecasts predict that other developments will contribute to the upward pressure on mortgage rates next year.
“The rates are going to go up, there is going to be some consolidation in the mortgage industry and that is going to create more price competition, so your margins are going to squeeze slightly,” David Stevens, former executive director of the MBA and CEO of Mountain Lake Consulting said Wednesday at a virtual event hosted by the Empire State Mortgage Bankers Association.
Although the overall volume may be lower next year, the mortgage market is expected to remain historically strong thanks to extraordinary housing demand and a relative shortage of supply which is expected to drive purchase volumes to new highs, a added Stevens.
The number of owner households has seen significant year-over-year gains in recent years, according to a 2019 report from the Joint Center for Housing Studies at Harvard University, and this is expected to continue given current demographics, he said.
“I’m telling you, it’s an unbeaten game,” Stevens said. “We haven’t seen this type of demographic perspective since the baby boom generation began their peak buying years in the early 1980s. I am part of the larger cohort of the baby generation. -boom. We have led the housing market for three decades, and this is what this millennial generation is going to do for all of you.