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Lower loan profits could be the new normal

Per-loan profits for nonbank lenders, although volatile in recent years, generally have trended lower as the costs to originate residential mortgage loans have increased, surveys by the Mortgage Bankers Association (MBA) suggest. In this past first quarter, the per-loan profit increased by $332, to $825 per loan, but that net gain per loan was down from $1,447 in the first quarter of 2015. Meanwhile, the total production cost to originate a residential mortgage loan rose by $98 in the first quarter, to $7,845. MBA Chief Economist Mike Fratantoni discussed factors that influence loan profits, and what falling profits and rising  costs have meant to the mortgage industry.

What are the main factors that influence an originator’s profits?   

MBA FratantoniOn the revenue side, fluctuations in gain on sale [of mortgages], and particularly servicing values [when the mortgage servicing rights are sold] can be important. However, the primary driver of decreased profitability in recent years has been the very large increases in loan-production expenses.

How are widening mortgage spreads, or the yields sought by investors in securities over the primary rate, related to per-loan profits?

In a competitive market, increases in costs which impact all lenders are eventually passed on to borrowers in the form of higher rates or costs. In the short term, lenders may accept tighter profit margins, but that is not viable long term as lenders must provide their investors a competitive rate of return on their capital. 

Can you talk a little about why mortgage costs have been rising?

The increase in loan-production expenses has primarily been a result of higher back-office costs, including increased personnel expenses for additional experts in risk management, quality control and regulatory compliance. Lenders have also been spending more on technology, legal, and other corporate expenses to manage their compliance risk. Additionally, as the average loan size has increased, sales expenses have increased as well.

What have been the implications for the mortgage industry because of falling loan profits?

We have seen a robust pace of consolidation with significant merger and acquisition activity, as lenders are seeking sufficient scale to be able to handle the higher fixed costs of the business.

Do you see this trend reversing itself?

No, this looks like a persistent change in the economics of the business.

For this story, Fratantoni responded in writing to questions posed in advance by Scotsman Guide News. 


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