Mortgage earnings per loan hit record high in Q3 2020
The money lenders make 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 the independent mortgage companies and mortgage lending subsidiaries of chartered banks was 203 basis points of the capital balance of each unit created during the period. This translates to a net income of $5,535 per loan.
By comparison, there was 73.8 basis points of profit or $1,924 of net income on each mortgage taken out in the third quarter of last yearand 167 basis points of profit or $4,548 of net income from the other product during the second quarter of this year.
Spending per loan in the third quarter of this year averaged $7,452, 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 lenders pay a lot to recruit enough new hires to keep up with the flood of loans that are pouring in.
“Production expenses generally decrease with increasing volume, as fixed costs are spread over more loans. But in the third quarter, costs rose despite the increase in volume. One of the main reasons for this increase was escalating personnel costs,” said Marina Walsh, vice president of industry analysis at the MBA, in a press release.
While rising costs may not hurt mortgage companies immediately, as they are more than offset by high-rate refinance revenue, there is a general expectation in the industry that the longer a refi boom lasts , the greater the risk of downward pressure on there will be margins.
“It’s the normal cycle you expect to see in the industry when there are these big waves of refis,” said Nathan Lee, partner at industry consultancy Richey May. “When the refi boom goes on for a long time, rates start to go up and refis start to slow down even a little, and then mortgage companies start to compete. They say, “We’re going to reduce our margin and we’re going to reduce our prices so we can continue to generate volume.”
Margins could also decline due to a fee of 50 basis points on the refinances that government-sponsored companies imposed this month. There is some hope that the new Biden administration will reconsider these fees given its interest in promoting affordable housing. But even if it is, forecasts predict that other developments will contribute to upward pressure on mortgage rates next year.
“Rates are going to go up, there’s going to be some consolidation in the mortgage industry and that’s going to create more price competition, so your margins are going to compress a bit,” said David Stevens, former executive director of the MBA and CEO of Mountain Lake. Consulting, said during a virtual event hosted by the Empire State Mortgage Bankers Association on Wednesday.
Although overall volume may be lower next year, the mortgage market is expected to remain historically strong thanks to extraordinary housing demand and relatively scarce supply which should boost purchase volumes. to new heightsStevens added.
The number of homeowner households has seen large year-over-year gains in recent years, according to a report 2019 by Harvard University’s Joint Center for Housing Studies, and that should continue given current demographics, he said.
“I’m telling you, it’s a no-loss game,” Stevens said. “We haven’t seen this type of demographic view since baby boomers began their peak buying years in the early 1980s. I’m part of the largest cohort of baby boomers. -boom. We’ve led the housing market for three decades, and that’s what this millennial generation is going to do for all of you.