The moneylenders who make money on every home loan hit another record high in the third quarter despite increased spending that put pressure on margins, according to the Mortgage Bankers Association.
The average pre-tax production profit for independent mortgage and home loan companies of chartered banks was 203 basis points of the principal accrued for each unit during the period. This translates into a net profit of $ 5,535 per loan.
By comparison, there was 73.8 basis points of profit, or $ 1,924 net profit, for each mortgage made in the third quarter of last year and 167 basis points of profit, or $ 4,548 net profit of each other, in the second quarter of this year.
Spend per loan averaged $ 7,452 for the third quarter of this year compared to $ 7,217 for the same period last year and $ 6,566 for the second quarter of 2020.
Despite the economies of scale that come with high volumes, costs have increased as mortgage companies pay a lot to hire enough new staff to keep up with the flow of incoming credit.
“Production costs usually decrease as volume increases, as the fixed costs are spread across more loans. In the third quarter, however, costs increased despite the increase in volume. A major reason for this increase was rising labor costs, "said Marina Walsh, vice president of industry analysis for the MBA, in a press release.
While rising costs may not hurt mortgage companies immediately as they are more than offset by income from high-yield refinancing, the general expectation in the industry is that the longer a refi boom lasts, the greater the risk of downward pressure on margins .
"It's the normal cycle you expect in the industry when there are big waves of refi," said Nathan Lee, partner at Richey May. "If the refi boom is a long time coming, interest rates will go up again and the refis even slow down a little. Then the mortgage lenders begin to compete with each other. They say: "We will squeeze our margins and lower our prices so that we can continue to increase the volume."
Margins could also shrink due to a 50 basis point refinancing fee imposed by the state-sponsored companies this month. It is hoped that the future Biden administration will reconsider this fee given its interest in promoting affordable housing. However, projections assume that other developments will put upward pressure on mortgage rates over the next year.
"Interest rates will rise, the mortgage business will consolidate somewhat, and there will be more price competition so your margins will compress slightly," said David Stevens, former executive director of the MBA and CEO of Mountain Lake Consulting, during a virtual event from the Empire State Mortgage Bankers Association on Wednesday.
While the overall volume may be lower over the next year, the mortgage market is likely to remain historically strong due to exceptional home demand and relatively low supply, which is expected to drive purchase volume to new highs, Stevens added.
According to a 2019 report by Harvard University's Joint Center for Housing Studies, the number of owner-occupied households has increased significantly in recent years from a year earlier, and this is likely to continue given the current demographic.
"I'm telling you this is a no-loss game," said Stevens. “We haven't seen this kind of demographic since the baby boom generation began their prime buying years in the early 1980s. I'm in the largest cohort of the baby boom generation. We've been driving the real estate market for three decades, and this will be this millennium Generation do for you all. "