The housing market showed its resilience in 2020 despite the COVID-19 pandemic throwing the country into disarray, and independent mortgage banks (IMBs) reaped the benefits.
According to the Mortgage Bankers Association (MBA), IMBs and mortgage subsidiaries of chartered banks made an average profit of $4,202 on each loan they originated in 2020. That’s nearly triple what they made in 2019, when they profited $1,470 on average from each loan.
Marina Walsh, the MBA’s vice president of industry analysis, called 2020 “a banner year for the mortgage industry, despite the COVID-19 global health crisis essentially shutting down the U.S. economy in March and forcing personnel into remote work environments.”
“A surge in housing and mortgage demand, record-low mortgage rates, and widening credit spreads translated into soaring net production profits that reached their highest levels since the inception of MBA’s annual report in 2008,” she said.
In basis points, the average production profit was 157 basis points in 2020, compared to 58 basis points in 2019. Net production income was already strong in the first half of the year at 131 basis points, before increasing further to 174 basis points in the second half as the housing market re-heated.
Notably, 2020 proved to be an outlier year in terms of production expenses. Typically, per-loan expenses drop as volume rises, but with companies offering various compensation incentives to increase personnel and meet loan demand in 2020, production costs actually rose in 2020. An increase in loan balances — first-mortgage balances reached a record high of $278,725 in 2020, the 11th straight year of rising first-loan balances — also translated into big sales commissions, further driving production expenses upward.
“On the servicing side of the business, heavy prepayments, combined with elevated default and forbearance activity, contributed to a loss of servicing income. Valuation markdowns on mortgage servicing rights and servicing amortization resulted in heavy hits to the overall servicing bottom line, especially for those servicers that did not hedge their MSRs,” said Walsh.
Those servicing losses, however, were countered by strong production revenues, led by stout secondary marketing gains. Including both production and servicing operations, 99% of companies assessed by the MBA posted overall pre-tax net financial profits in 2020. That’s up from 92% the previous year, and only 69% in 2018.
Average production volume came in at $4.5 billion (on 16,198 loans) per company in 2020, up from $2.7 billion (on 10,411 loans) per company one year prior. The MBA estimated that the entire mortgage industry as a whole saw production volume of $3.83 trillion in 2020 — the highest annual volume ever recorded by the organization, jumping from $2.25 trillion in 2019.
Most of that 2020 volume came via refinance loans, with the refi share of total originations (by dollar volume) vaulting to 55% from 34% in 2019. With many borrowers already refinancing their homes to take advantage of last year’s historically low rates, that share is bound to regress this year, making agility important for lenders in 2021, Walsh said.
“In early 2021, we are already seeing declines in pipeline volume — particularly refinance volume — as mortgage rates have risen in the first quarter,” she said. “Also, secondary marketing income has dropped from last year’s highs, as credit spreads have tightened. Mortgage companies that can adjust quickly to changing market conditions and are able to harness still robust purchase demand are best poised for a successful 2021.”