Mortgage lender profits are crashing.

March 29, 2021

Dear Friends, Colleagues and Clients:

  • MBA just published the quarterly performance report for Q4 2020 and it does not look good at all. But the bigger worry is not about Q4 numbers, it is that - the numbers are a sign of things to come.

  • Profit margins for independent mortgage banks (IMBs) and mortgage subsidiaries of chartered banks shrank dramatically in the fourth quarter of 2020 as costs climbed. IMBs reported a net gain of $3,738 per each originated loan in the fourth quarter, down from $5,535 during the third quarter - a whopping 33% drop.

  • Inspite of a higher origination volume, production expenses increased by almost $500 per loan from the third quarter. This is primarily driven by an increase in personnel costs across sales, fulfilment, production support, and overheads.

  • Production expenses stood at $7,938 per loan in the fourth quarter, up from $7,452 per loan in the third quarter. If that does not sound too bad, consider this - for the 12 years prior to this quarter, loan production expenses averaged $6,594 per loan.

  • In fact, total loan production expenses – commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations – increased to $7,938 per loan in the fourth quarter, up from $7,452 per loan in the third quarter. From the third quarter of 2008 to last quarter, loan production expenses have averaged $6,594 per loan.

  • Now imagine what would happen if the production volume, say comes down by 20%. What would it do to your business.

  • As they say, a rising tide lifts all boats. That is exactly what happened in 2020 for mortgage lenders. Who will keep sailing and who will be stranded when the tide goes back depends on how efficient and flexible your operation costs are. It is time to think about all those things that you put away for later - Automation, Up-skilling & Cross-skilling people, cut-down shipping times, standardize processes.

  • Profits are a lagging metric. You need to focus on leading metrics. The two metrics we would urge you to focus on are: Cycle Time and Productivity. Check this previous issue we did on metrics that matter for mortgage lenders.

  • You need automation and better systems and controls not only to improve productivity, but also to reduce defects. Covid pushed the overall critical defect rate for mortgage lenders rose to 2.34%, the highest in 5 years. This is what happens when you have to add a lot of people and get them to do loan production without proper processes, systems and training in place.

  • There are things to worry about for servicers too. Banks and mortgage servicers have been expecting a deluge of loan modification requests when federal mortgage forbearance relief ended in Sep 2021. FHFA announced last month that it is further extending forbearance relief until September 2021 — giving borrowers with federally-insured loans a total of 18 months’ reprieve on mortgage payments. The further out the deadline gets, the bigger the write downs that banks and servicers will have to swallow.

  • One may argue that, it is better to keep a loan in forbearance than to let it foreclose. The idea being that - after the forbearance period borrowers will start paying again based on original terms. But that is not the case. As per Fed estimates - roughly 80% of loans in forbearance would need an interest rate reduction to make the payment affordable while another 2% would need a combination of term extension, interest-rate reduction and principal deferral. You can imagine the impact on servicers and investors when this happens. As much as servicers need to be efficient, they need good lobbyists to tell their part of the story to the federal government and get some relief. So far, that does not seem to be happening.

  • The situation on servicing side does open up opportunities for well funded banks, lenders and investors to buy the delinquent loans and increase their book size. Wells Fargo and U.S. Bank were doing exactly this last year and Lakeview Loan Servicing and PennyMac are doing the same now. If you are thinking about doing this, make sure you have a well oiled machine for pricing, due diligence and loan boarding. Check this white paper on how intelligent automation can help you.

  • We published another fantastic episode of Mortgage Vault podcast. In this episode, Matthew Lehnen, CTO at Deephaven Mortgage talks about the opportunities & challenges on the path to 360 degree adoption of technology in the mortgage industry. Listen to it on Apple Podcasts, Spotify and Google Podcasts. In case you missed - in the previous episodes, we spoke to Stan Middleman, CEO of Freedom Mortgage and Mike Lyon, EVP of Nexsys Tech.

  • I was reading the Jan 2014 edition of National Geographic and found that there are still countries where divorce is not allowed. Can you believe that? Yes, divorce is barred in the Vatican and the Philippines. I could never have guessed that.

  • Now why was I reading the old National Geographic magazine? Well, I am trying to reduce my screen time. But the moment I read that, I found myself reaching to my phone and googling about it :(

Have a great week ahead.

Lender profit margins fell to $3,788 per funded loan in the fourth quarter from $5,535 in the third quarter. Here's why.

In the mortgage workforce, thousands of workers are hired when margins and profits are fat, and just as many are fired when margins slim.

The overall critical defect rate for mortgage lenders rose to 2.34% in the third quarter of 2020, the highest rate observed since ACES Quality Management™ (ACES) began publishing its...

COVID pushes critical defect rate to 5-year high.

The FHFA’s forbearance extension to September is forcing nonbank servicers to buy out more delinquent loans. It's also upended loss estimates for investors and made racial and income disparities in the mortgage market worse.

‎Are we close to universal adoption of technology in the mortgage industry ?: In depth conversation with Matthew Lehnen, CTO at Deephaven Mortgage