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Home >> Daily Dose >> Closing Costs Sink Profits at Independent Mortgage Banks
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Closing Costs Sink Profits at Independent Mortgage Banks

Closing Costs Sink Profits at Independent Mortgage Banks

Independent mortgage banks earned a profit of nearly $600 less per origination in last year’s fourth quarter than they did in the third, thanks in large part to soaring closing costs.

According to the Mortgage Bankers Association’s (MBA) Performance Report for Q4, independent mortgage banks and mortgage subsidiaries of chartered banks took in an average profit of $150 on each loan they originated, a record low. That number was down from $743 per loan in Q3.

“Fourth-quarter production profits were at their lowest levels since [the] inception of the Performance Report in 2008, driven by study-high costs in a declining mortgage market,” said Marina Walsh, MBA’s VP of industry analysis.

The “net cost to originate”—a stat that includes all production operating expenses and commissions, minus all fee income—marched up to $5,171, an increase of just less than $600.

Brian Benson, CEO of ClosingCorp, a firm specializing in providing closing cost data and technologies to mortgage lenders, says the rise in costs is “reflective of what banks and lending institutions are struggling with right now,” especially as they slow down to ensure due diligence and adherence to regulatory standards.

“They’re taking more time, and that slows down production and increases costs,” Benson said.

He added that the latest performance data shows the necessity of tools, technology, and experts to aid lenders in originating more efficiently: “Once they’ve engaged in that process, pretty quickly they see that they’ve got to have outside people to help them.”

Average production volume per company in Q4 was an estimated $367 million—down $24 million from the period prior—as the average volume count came down to 1,641 loans.

While the overall decline in volume could be attributed to a slowdown in the lending process, it also underlines continued weakness in purchase volumes, which have struggled to fill the gap left by dwindling refinance demand. Among independent mortgage banks, the purchase share of total originations (by dollar volume) increased to 69 percent as of the end of the quarter; at the same time, MBA’s unadjusted Purchase Index showed application volume in that segment was down 11 percent at the end of 2013 compared to the previous year.

The silver lining was in the mortgage servicing arena, where income per loan increased to $355 from $224 in the third quarter, boosting the average profit to 19 basis points. However, while that increase provided a nice windfall for companies working in the space, it may not provide much comfort for smaller operators.

“[N]ot all mortgage companies retained mortgage servicing rights or generated margins large enough to offset production losses,” Walsh said. “It is perhaps not surprising that only 58 percent of participating companies had overall positive pre-tax profits in the quarter.”

One comment

  1. Profile photo of Bruce Specter
    Bruce Specter Advisory Mortgage Planner/Business Development

    This is a designed play to further homogenize the conforming sector of lending by creating an unprofitable environment for the small to mid-size mortgage bank. Scale and further automation is the key, providing the greased skids as the regulators unwind themselves from the current GSE model.

    This reflects the sentiments I have espoused for some time. As stated before, and further articulated by Tony, this is not new to business. In my former technology life, I was involved with an IBM project for American Express called ‘CS of the 90’s’. It was about increasing the intelligence of the technology to reduce errors as well as the need for highly trained customer service reps due to an incredibly high turnover rate.

    Fast forward, QM may be this decades version. Consider the winding down of the GSEs and getting more of the private sector involved. With underwriting becoming more logic driven, vanilla lending can easily be handled via web and call/processing center with limited QC on the backend. That’s a make sense deal for investors on the secondary market creating a macro version of what Quicken has already built. Originators will best serve the niche and non-QM markets going forward.

    For the traditional small to mid-market mortgage bank, costs continue to go up while regulators make sure income continues to fall, I would add, by design (lobbyists doing what they do!).

    The self-serving support of real estate agent commissions by Zillow today was pandering at it’s best. The 6% ‘standard’ is long overdue for disruption. As more homeowners see equity increase, agencies need to provide a sliding scale for fees. Here in the Reno area,, there are over 2900 licensed agents. 300 have done over $1M in transactions in 2013. That number is also 1% of our population. 1%! The fallacy of easy money is the lure for most and I would say fewer than 5% of that number do it professionally.

    The elephant in the room are the title companies. We’ll leave that for another discussion.

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