Mortgage Banker Profits Rise with Secondary Market, Refinancing Gains

Independent mortgage banks and their subsidiaries made an average profit of $1,423 on each loan they originated in the third quarter, thanks to a surge in refinance activity and growing demand for mortgage-backed securities (MBS), the ""Mortgage Bankers Association"":http://www.mortgagebankers.org (MBA) reported Tuesday.
[IMAGE] The third quarter's per-loan profit represents a jump of more than 55 percent from the $917 independent mortgage lenders made on each loan in the second quarter of this year.

MBA said in its report that the increase was driven primarily by higher secondary marketing gains that increased from $3,455 per loan in the second quarter to $4,069 per loan in the third. The secondary marketing gains offset further increases in the cost to originate a loan.

Marina Walsh, MBA's associate VP of industry analysis, also explained that mortgage interest rates were driven down to half-century lows during the third quarter, which caused those homeowners who were on the fence about refinancing to finally take the plunge.

The refinance share of total originations for MBA’s sample of independent mortgage bankers and subsidiaries rose to

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57 percent last quarter, compared to 35 percent in the second quarter of 2010 and 44 percent in the third quarter of 2009.

MBA says lenders struggled to close the higher volume of refinance applications received, which had an impact on pull-through rates (the number of closings divided by the number of loan applications). The study found that the average pull-through was down to 68 percent in Q3 from 72 percent in the previous three-month period.

The trade group reported that the ""net cost to originate"" increased from $2,611 per loan in the second quarter to $2,720 in the third. The ""net cost to originate"" includes all production operating expenses and commissions minus all fee income, but excludes secondary marketing gains, capitalized servicing, servicing released premiums, and warehouse interest spread.

Walsh said, ""Historically, higher origination volume translates into a lower cost to originate per loan. This has been particularly true during refinancing waves. However, with stricter lending standards in place, higher volume did not result in lower origination costs in the third quarter 2010.”

She went on to explain, “Although the average origination volume per company rose to $237 million in the third quarter from $197 million in the second quarter, direct loan production expenses rose to $4,539 per loan in the third quarter from $4,438 in second quarter.""

MBA says total personnel expense also rose slightly to $3,034 per loan in Q3, compared to $3,017 per loan in Q2. A year ago, personnel expenses averaged $2,770 per loan.

Eight-eight percent of the firms in MBA’s study posted pre-tax net financial profits in the third quarter of 2010. MBA analyzed production data from 307 companies for its latest report.