The days of real estate gold rush is long over. The decade between 1990 and 2000 saw mortgage origination at its peak with lenders charging 4 to 5% of the loan amount as brokerage fees. However, the money-making stride abruptly ended thanks to the financial crisis of 2008. The lender's struggle deepened further with the introduction of Dodd-Frank compliance in 2014. But why are mortgage lenders reporting negative profits? Read ahead to know more.
The historical reports indicate that the loan expenses stood at an average of $6224 between 2008 and 2018. The expenses involved in loan production such as occupancy, commission, equipment, compensation, and other expenses were at an all-time high of $8957 in Q1 of 2018 while it was $8775 in Q4 of 2017. The free-falling loan volume led to net production touching negative profit margin.
The mortgage origination costs or mortgage originating fees are invoiced by lenders as an upfront fee for processing a fresh mortgage loan application. This fee is a compensation for initiating the loan. The fee for this process is nominal and constitutes 1% of the total loan amount. It can sometimes be lesser than a percentage, but borrowers must never expect lenders to service loans at free of cost.
The lenders charge a commission, also known as mortgage origination fee from clients for processing the application. Mortgage rates are typically 1% of the loan amount or lesser. Since processing a high LTV and low LTV takes the same effort, the mortgage origination fee is calculated by considering the highest percentage of the loan amount in the case of inexpensive loans. Going by the mortgage reports of 2018, here is a compilation of causes that has brought negative profits to mortgage lenders -
The productivity for mortgage origination decreased from 2 loans originated per production employee per month in the 2017 Q4 to 1.9 loans originated per production employee per month in Q1 of 2018
Increase in the rate of interest led to lower refinancing
Seasonality changes have affected the borrower behavior as homes are less likely to be purchased during fall and winter
Combating the freefalling profit margin is not an easy task. The Mortgage Bankers Association (MBA) is uncertain about of a definitive solution. However, some mortgage experts argue that certain countermeasures can be useful in containing the negative profits. The two recommended method to limit the mortgage origination costs are as follows -
Mortgage origination cost is flexible and can be negotiated with lenders. However, to get a reduced origination cost the borrower must acknowledge a higher rate of interest. In this way, the lender gets paid via yield spread premium rather than the origination fee, but should borrowers accept this?
If the intent of the borrower is to refinance or sell the collateral in a few years. If not, then it is profitable to pay a higher origination fee for a lower rate of interest. This is because the saving made over a period through interest exceeds the cost of originating a mortgage.
Flatworld Solutions is an ISO 9001:2015 certified provider of mortgage origination services. We are a trusted partner to over 200+ lenders worldwide as we share the latest insights to help you increase the loan requests as well as the revenue. When you choose Flatworld Solutions' mortgage services you can build traction with potential borrowers and increase your business footprint in any global markets. We are tech-enabled with latest software and hardware infrastructure to help our team of skilled mortgage originators, appraisers, and underwriting professionals execute your needs with care and precision. We also provide timely support so that you can get help anytime, anywhere in an instant. We also provide other mortgage solutions such as mortgage closing support, mortgage title support, mortgage appraisal support, and more.
Contact us if you want to start a profitable business with your mortgage clients.