There was a dramatic turnaround for many mortgage banks in the second quarter as their production profits increased nearly six-fold compared to the previous period.  The Mortgage Bankers Association (MBA) said the independent mortgage banks (IMBs) and mortgage subsidiaries of chartered banks responding to their survey said they had an average net gain of $1,675 on each loan they originated, up from a reported gain of $285 per loan in the first quarter of 2019.  Including all business lines (both production and servicing), 85 percent of the firms in the study posted pre-tax net financial profits for the quarter.  Only 59 percent did so in the first quarter.  

"Production profits in the second quarter of 2019 were the best MBA has seen since the third quarter of 2016 ($1,773 per loan), as production volume rose and expenses declined significantly," said Marina Walsh, MBA's Vice President of Industry Analysis. "In fact, the drop in production expenses, by over $1,500 per loan, was the largest quarterly decline reported since the inception of this study in 2008." 

Added Walsh, "With anticipated increases in prepayment activity, we saw hits to servicing profitability resulting from mortgage servicing right (MSR) markdowns and amortization. Nonetheless, the profitability on the production side of the business generally outweighed servicing losses."

Companies averaged a loss of $74 per loan in servicing net financial income (non-annualized) in the second quarter, double the average loss of $37 on the first quarter.  Servicing operating income, which excludes MSR amortization, gains/loss in the valuation of servicing rights net of hedging gains/losses and gains/losses on the bulk sale of MSRs, was $42 per loan in the second quarter, compared to $58 per loan in the first quarter.

Secondary marketing income was also down.  Companies reported in the current release of MBA's Quarterly Mortgage Bankers Performance Report that income averaged on net 287 basis points (bps) in the second quarter, down from 308 bps in the first quarter. On a per-loan basis, net secondary marketing income decreased to $7,411 per loan in the second quarter from $7,591 per loan in the first quarter.

The average loan production per company in the second quarter was 2,312, outpacing an average of 1,571 originations in the prior period. Average production volume was $601 million, up from $385 million in the first quarter.  Companies closed 70 percent of the loans for which they received applications, a slight improvement over the 69 percent pull-through rate in Quarter 1.

Banks reported pre-tax production profit averaging 64 bps compared to an average of 8 bps in the first quarter of this year.  Total production revenue (fee income, net secondary marking income and warehouse spread) was $9,400 per loan in the second quarter, down from a study high of $9,584 per loan in the first quarter. On a bps basis this is 393 bps in the first quarter versus 370 bps in the second.

Total loan production expenses - commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations - fell to $7,725 per loan in the second quarter from a study high of $9,299 per loan in the first quarter. From the third quarter of 2008 to last quarter, loan production expenses have averaged $6,465 per loan.

Productivity increased to 2.3 loans originated per production employee per month in the second quarter, up from 1.8 loans per production employee per month in the first quarter. Production employees includes sales, fulfillment and production support functions. Personnel expenses averaged $5,186 per loan in the second quarter, down from $5,931 per loan in the first quarter.

The purchase share of total originations, by dollar volume, decreased to 74 percent in the second quarter from 76 percent.  MBA estimates that industry-wide the purchase share of originations was 71 percent.

The average loan balance for first mortgages reached a study high of $268,520 in the second quarter, up from $257,374 in the first quarter.

There were 328 companies reporting production data to MBA in the second quarter.  Eighty percent were independent mortgage companies, and the remaining 20 percent were subsidiaries and other non-depository institutions.