Mortgage Industry Production Margins In 2001 Exceed Last Refinance Boom

June 25, 2002

WASHINGTON, D.C. (June 24)—Mortgage industry production margins during the 2001 refinancing wave exceeded levels reached during the last refinancing boom in 1998, according to figures from the latest Peer Group Roundtables (PGR) conducted by the Mortgage Bankers Association of America (MBA) and The STRATMOR Group.

On the production side, fully loaded pre-tax weighted average production margins rose to 70 basis points in 2001 (i.e., 0.70% of the principal balance of loans produced) from 6 basis points in 2000. The 2001 production margin was 19 basis points higher than the average margin of 51 basis points earned during the 1998 refinancing year.

The improving production margins across refinancing cycles can be attributed to several factors. Industrywide, mortgage originations totaled $2.03 trillion in 2001, compared with $1.51 trillion in 1998. At the same time, the refinancing share of originations grew to 57 percent in 2001, compared with 50 percent in 1998. Second, federal rate cuts for short-term borrowing improved net interest spread income on warehoused loans. Third, based on the PGR data, company staffing increases were minimized, increasing only 9 percent over 2000 levels despite increased production.

On a year-over-year basis, the weighted average profit margins for retail production channel showed the most dramatic change. The average retail profit margin rose to 80 basis points in 2001, from –3 basis points in 2000 and 60 basis points in 1998. This translates into pre-tax net income of $1,212 per loan compared with a net loss of $37 per loan in 2000 and a net gain of $701 per loan in 1998. Production margins also increased in the broker and correspondent production channels on a year-over-year basis as well as between refinancing cycles. Megalenders continued to outperform their peers in all production channels.

"Based on our discussions with participants, there was a big push to spread more loans over the existing sales and operations staff rather than going on a hiring binge," said Marina Walsh, a financial analyst with MBA. "Productivity for loan officers and account executives doubled between 2000 and 200,1 which helped drive margins up."

"Despite these results," cautioned James M. Cameron, partner with The STRATMOR Group, "when compared with the last refinance boom in 1998, productivity and fully loaded origination costs have not dramatically changed. For example, in the retail channel, higher average loan amounts and commission payouts drove costs up, while loans produced per full-time equivalent (FTE) rose just 12 percent."

On the servicing side of the business, margins dropped significantly due to the high turnover of serviced loans due to refinancing. Net servicing financial income, which includes amortization of servicing rights, impairment, hedging and sale of servicing rights, dropped in 2001 to a loss of $17 per loan from net income of $106 per loan in 2000. The primary reason for this change was the sharp increase in writedowns and amortization of mortgage servicing rights. Impairment writedowns were only partially offset by hedging gains, and amortization expense rose as prepayment assumptions changed.

In terms of total mortgage industry profitability, for most participants the production profits more than offset servicing losses for the year 2001. In the PGR sample, the average firm's pre-tax net income was $119 million, compared with $59 million in 2000. Overall, the weighted average return on required equity increased to 31.8 percent from 15.8 percent in 2000.

Source: Mortgage Bankers Association

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