According to the Mortgage Bankers Association, money lenders make every home loan another survey record high in the third quarter, despite higher spending putting downward pressure on margins.
The average production profit before taxes for independent mortgage companies and mortgage lending subsidiaries of licensed banks was 203 basis points of the principal balance of each unit originated during the period. That translates to a net income of $5,535 per loan.
By comparison, there was 73.8 basis points of gain or $1,924 of net income on each mortgage originated in the third quarter of last yearand 167 basis points of profit or $4,548 of net income each produced during the second quarter of this year.
Loan expenses in the third quarter of this year were $7,452 on average, compared to $7,217 during 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 are rising because mortgage companies are paying a lot to attract enough new hires to keep up with the influx of loans.
“Production expenses tend to fall with higher volume, as fixed costs are spread over more loans. But in the third quarter, costs increased despite the increase in volume. One of the main reasons for this increase was the increase in personnel costs,” said Marina Walsh, vice president of industry analysis for the MBA, in a press release.
While rising costs may not hurt mortgage companies right away, as they are being more than offset by proceeds from high rate-based refinancing, there is a general expectation in the industry that the longer the the refinancing boom, the greater the risk of downward pressure on margins there will be.
“It’s the normal cycle you’d expect to see in the industry when there are big waves of refinancing,” said Nathan Lee, a partner at industry consultancy Richey May. “When the refinance boom drags on, rates start to go up and refinances start to slow even a little bit, then mortgage companies start to compete with each other. They say: ‘We are going to squeeze our margin and we are going to reduce our prices so that we can continue to enter volume'”.
Margins could also be reduced due to a fee of 50 basis points on the refinancings that government-sponsored companies imposed this month. There is some hope that the incoming Biden administration will reconsider this fee given its interest in promoting affordable housing. But even if you do, forecasts they forecast that other developments will add to the upward pressure on mortgage rates next year.
“Rates are going to go up, there’s going to be some consolidation in the mortgage business and it’s going to create more price competition, so your margins are going to compress a little bit,” David Stevens, former MBA CEO and CEO of Mountain Lake . Consulting, during a virtual event hosted by the Empire State Mortgage Bankers Association on Wednesday.
While overall volume may be lower next year, the mortgage market is likely to remain historically strong thanks to extraordinary demand for homes and a relative shortage of supply that is expected to drive purchase volumes. to new highsStevens added.
The number of homeowners has seen big gains year over year in recent years, according to a 2019 report by Harvard University’s Joint Center for Housing Studies, and that’s likely to continue given current demographics, he said.
“I’m telling you, this is a no-loss game,” Stevens said. “We haven’t seen this kind of demographic viewpoint since the baby boomers began their peak buying years in the early 1980s. I’m in the largest cohort of the baby boomers. We powered the housing market for three decades, and that’s what this millennial generation will do for all of you.”