According to the Mortgage Bankers Association's newly released 2020 Annual Mortgage Bankers Performance Report, independent mortgage banks and mortgage subsidiaries of chartered banks made an average profit of $4,202 on each loan they originated in 2020, up from $1,470 per loan in 2019.
"2020 was 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," said Marina Walsh, MBA's Vice President of Industry Analysis. "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."
Walsh noted that in an unusual twist, the driver of production profitability in 2020 was production revenue, led by strong secondary marketing gains. Historically, production expenses drop when volume increases, but per-loan production expenses went up in 2020, as companies offered to sign bonuses, incentives, overtime, and other compensation to address capacity constraints and meet mortgage demand. Furthermore, rising loan balances meant hefty sales commissions, often earned based on a percentage of the loan amount.
"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 services that did not hedge their MSRs," said Walsh.
Profits on the production side of the business generally compensated for the servicing losses. Including both production and servicing operations, 99 percent of the firms posted overall pre-tax net financial profits in 2020, compared to 92 percent of firms in 2019 and only 69 percent of firms in 2018.
Added Walsh, "In early 2021, we are already seeing declines in pipeline volume - particularly refinance volume - as mortgage rates have risen in the first quarter. 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."