Mortgage lenders made a little less profit per loan during the first quarter, due mainly to higher operating expenses.
According to the Mortgage Bankers Association’s (MBA) quarterly performance report, lenders saw a net gain of $224 on each loan they originated in the first quarter – down from $575 in the fourth quarter.
The drop was due mainly to higher per-loan production expenses. These expenses – which include commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations – increased to a study high of $8,887 per loan in the first quarter, which is up from $7,562 in the fourth quarter.
For comparison purposes, the average cost to originate a loan in 2008 was about $5,985, according to the MBA’s data.
Personnel expenses in the first quarter averaged $5,802 per loan – up from $5,001 per loan in the fourth quarter.
Marina Walsh, vice president of industry analysis for the MBA, says that although “higher production revenues mitigated a portion of the cost increase, production profitability, nonetheless, declined by more than half the previous quarter.”
“For those mortgage bankers holding mortgage servicing rights [MSRs], an increase in mortgage interest rates resulted in MSR valuation gains and helped overall profitability,” Walsh says in a statement.
Of the 342 companies that reported production data for the first quarter, the average production volume was about $455 million per lender. That’s down from $690 million per company in the fourth quarter.
Average volume by count per company was 1,944 loans, down from 2,811 loans in the fourth quarter.
The average pre-tax production profit was 10 basis points (bps), down from an average net production profit of 24 bps in the fourth quarter. Since the inception of the performance report in the third quarter of 2008, net production income has averaged 51 bps.
The purchase share, by dollar volume, was 68% in the first quarter compared with 58% in the fourth quarter. For the mortgage industry as a whole, the MBA estimates that purchase share in the first quarter averaged 59%.
The average loan balance for first mortgages was $242,949 in the first quarter – down from $246,473 in the fourth quarter.
The average pull-through rate (loan closings to applications) was 70%, down from a study high of 76% in the fourth quarter.
Lenders Easing Credit Standards Amid Competition
More mortgage lenders say they have eased credit standards recently and expect further easing in the coming months, according to Fannie Mae’s second-quarter 2017 (Q2 2017) Mortgage Lender Sentiment Survey.
Overall, the share of lenders reporting they have eased mortgage credit standards over the prior three months has ticked up gradually since the fourth quarter of 2016. Additionally, when anticipating the next three months, the net share of lenders saying they plan to ease credit standards for government-sponsored enterprise (GSE)-eligible, non-GSE-eligible and government loans reached or surpassed survey highs this quarter.
Concerns regarding economic conditions were a top driver for changes in lending standards. Across the three loan types, the share of lenders that reported growth in purchase mortgage demand dropped to the lowest net reading in years for a second-quarter period.
The drop in purchase mortgage demand also reflects the latest findings in the Fannie Mae National Housing Survey, in which the net share of consumers who reported that now is a good time to buy a home dropped to a record low. The results of both surveys mirror the ongoing narrative for housing: Tight inventory has pushed up home prices, which is weighing on affordability and constraining sales.
“Expectations to ease credit standards climbed to survey highpoints in the second quarter as more lenders reported slowing mortgage demand and increasing concerns about competition from other lenders,” says Doug Duncan, senior vice president and chief economist at Fannie Mae. “Lenders cited additional contributing factors, such as diminishing compliance concerns and more support from the GSEs, including clarification on representations and warranties and tools that provide greater certainty during the loan underwriting process.
“Easing credit standards might also be due, in part, to increased pressure to compete for declining mortgage volume. For the third consecutive quarter, the share of lenders expecting a decrease in profit margin over the next three months exceeded the share with a positive profit margin outlook. For the former, the percentage citing competition from other lenders as a reason for their negative outlook reached a survey high,” Duncan adds.
Additional survey highlights include the following:
Purchase mortgage demand
The net share of lenders reporting demand growth over the prior three months has fallen for all loan types when compared with Q2 2016 and Q2 2015, reaching the lowest reading for any second quarter over the past two years.
However, the net share of lenders expecting increased demand over the next three months remains relatively stable for the same quarter year over year.
Refinance mortgage demand
The net share of lenders reporting rising demand over the prior three months fell significantly to a three-year low, across all loan types.
The net share of lenders reporting demand growth expectations for the next three months has changed little from last quarter (Q1 2017).
Easing of credit standards
The net share of lenders reporting easing of credit standards over the prior three months has gradually ticked up since Q4 2016.
Net easing expectations for the next three months have also gradually climbed. In particular, the net easing share for GSE-eligible loans and government loans for the next three months reached new survey highs this quarter (though modest in absolute percentage), and that for non-GSE-eligible loans tied a survey high reached in Q2 2014.
Lenders continued reporting expectations to grow GSE (Fannie Mae and Freddie Mac) and Ginnie Mae shares over the next 12 months and reduce portfolio retention and whole loan sales shares.
Mortgage servicing rights (MSR) execution
In the second quarter, slightly more lenders reported expectations to decrease rather than increase the share of MSRs sold and the share of MSRs retained and serviced in-house (as opposed to by a subservicer).
The majority of lenders continued to report expectations to maintain their MSR execution strategies.
The net share of lenders reporting a negative profit margin outlook has declined since reaching the survey’s worst reading in Q4 2016. However, more lenders reported a negative outlook than a positive outlook.
Midsize institutions are most likely to expect a net decrease in profit margin, while larger institutions are more likely to expect a net increase in profit margin.
Concern about competition from other lenders set a new survey high this quarter across all profit-margin drivers, cited as the key reason for lenders’ decreased profit margin outlook.
The perceived impact of “government regulatory compliance,” which declined sharply in Q4 2016, has remained low the past three quarters relative to most of the prior two years’ readings.
Mortgage Credit Risk Is Right Around The ‘Normal Baseline’
CoreLogic’s first-quarter 2017 Housing Credit Index (HCI) – a measurement of trends in six home mortgage credit-risk attributes – increased to 105.6, up 3.6 points from Q1 2016. But even with this increase, the level of credit risk in Q1 2017 is nearly the same as the average of 105.9 for the period of 2001 to 2003 – a time frame that is considered to be a normal baseline for credit risk, according to CoreLogic.
The slight loosening in the credit index during the past year was partly due to a shift in the mix of purchase versus refinance originations because purchase loans exhibit higher risk attributes than refinanced loans. Beginning in Q1 2017, the HCI was revised to include a more comprehensive source of loan-level, non-agency, mortgage-backed securities data. The result is that the HCI more accurately captures the loans that exhibited higher risk features during the mid-2000s.
“Mortgage rates during the first quarter of 2017 were up about 0.5 percentage points from a year earlier,” says Frank Nothaft, chief economist for CoreLogic. “Since 2009, for every one-half percentage point increase in mortgage rates, the average credit score on refinance borrowers has dipped by nine points, and this pattern will likely continue if mortgage rates move higher. That is because when rates rise, applications drop off and loan officers spend more time with the applicants that have less-than-perfect credit scores, require more documentation or have unique property issues.”
Nothaft also says investor activity and condo/co-op lending had increased in Q1 2017.
“Overall credit risk for purchase loans was slightly higher compared with a year ago, as the investor share and condo/co-op share increased,” he notes. “These increases offset lower-risk signals from the credit score, DTI and LTV attributes to result in an uptick in overall riskiness. Still, overall risk is similar to that of the early 2000s.”
Here are a few HCI highlights as of Q1 2017:
Credit score: The average credit score for home buyers increased seven points year over year between Q1 2016 and Q1 2017, rising from 734 to 741. In Q1 2017, the share of home buyers with credit scores under 640 was less than 3%, compared with 25% in 2001.
Debt-to-income: Holding steady at 36%, the average DTI for home buyers in Q1 2017 was similar to Q1 2016. In Q1 2017, the share of home buyers with DTIs greater than or equal to 43% was 24%, down slightly from 25% in Q1 2016 but up from 18% in 2001.
Loan-to-value: The LTV for home buyers fell by 1.7 percentage points between Q1 2016 and Q1 2017, from 87.6% to 85.9%. In Q1 2017, the share of home buyers with an LTV greater than or equal to 95% was 43%, down from 49% in Q1 2016 and up from 29% in 2001.
Documentation type: Low- or no-documentation loans remained a small part of the mortgage market, increasing from 2% to 3% of home-purchase loans during the past year.