Despite High Mortgage Origination Costs, Why are Mortgage Lenders Reporting Negative Profits?

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.

What is Mortgage Origination Fees?

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.

Top 3 Reasons Why Mortgage Lenders are Reporting Negative Profits

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 -

01

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

02

Increase in the rate of interest led to lower refinancing

03

Seasonality changes have affected the borrower behavior as homes are less likely to be purchased during fall and winter

How to Stop the Profit Margin from Sinking Further?

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 -

01

Seasonal hiring can mitigate the problem of low origination and slow growth. Cost savings can be achieved if mortgage origination specialists are seasonally hired

02

When competition is stiff, relying on the digital mortgage can cushion the cost burden by a certain margin

Fact Check - Mortgage Banker's Performance Report

• In 2014, after the introduction of Dodd-Frank compliance, a loss of $194 per loan was reported as loan originators faced a challenge to keep up with the regulatory compliance
• Earlier in the year 2018, at Mortgage Bankers Association's National Secondary Conference in New York, MBA chief economist Mike Fratantoni predicted that loan officers would report negative profits in the Q1 of 2018
• Subsidiaries and independent mortgage banks reported a loss of $118 per loan that was originated in the Q1 of 2018 - a gain of just $237 per loan was achieved from Q4 of 2017
• At the production end, the volume dropped from $505 million in Q4 of 2017 to $450 million in Q1 of 2018. More loans were processed last than the present one. 2059 loans in Q4 of 2017 against 1866 loans in Q1 of 2018
• The expenses incurred by lenders were copious this year (i.e.) $8475 in Q4 of 2017 against $8957 in Q1 of 2018

How to Lower Origination Fees?

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.

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