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Mortgage Profits, Quality Jump

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Last year, mortgage bankers saw an increase in loan production, a bigger share of their applications close and more earnings per loan. In addition, average credit scores rose and average loan-to-values fell, while the application conversion rate improved.

A study released today by the Mortgage Bankers Association indicated that 219 firms it surveyed each originated an average of 4,562 loans for $933 million during 2009, more than 2,587 loans for $500 million in the previous year. Average loan closings per production employee rose to 4.32 loans per month from 2.76.

The average firm had 131 production employees, up from 110 in 2008. The latest total included 70 sales employees and 36 fulfillment employees.

Government share of loan originations, based on dollar volume, fell to 41 percent from 46 percent in 2008. Looking at just banks and thrifts, MBA reported government share at just 27 percent versus 44 percent for independent firms The high share contrasts with data from Freddie Mac, which in June reported overall government share at just 23 percent last year.

But an MBA spokeswoman explained in a statement to that many of the independent lenders might be selling government production to mega-lenders on a correspondent basis, and the FHA share is likely higher for independent firms in the retail channel.

First-mortgage borrowers with FICO scores under 651 accounted for 13 percent of last year’s production, sinking from 22 percent. At the same time, borrowers with scores higher than 700 jumped to 68 percent from 55 percent.

Last year’s overall average FICO score rose to 720 from 696.

MBA said mortgages with LTVs above 90 percent represented 37 percent of 2009 activity, lower than 43 percent a year earlier. The share of loans with LTVs below 81 percent, meanwhile, rose to 52 percent from 45 percent — with the biggest increase occurring with LTVs under 60 percent.

The average LTV last year was 75 percent, less than 77 percent in 2008.

Retail originators generated 79 percent of last year’s production, edging down from 80 percent in 2008. Third-party origination share crept up to 21 percent from 20 percent.

MBA said that of all applications taken last year, an average of 68 percent closed. The average pull-through rate rose from 57 percent in 2008.

Including secondary and warehousing income, lenders earned $1,135 in production profits per loan during 2009. Per-loan profits were just $305 in 2008 and negative during the prior two years.

Last year’s profit rate was 61 basis points, jumping from the previous year’s 15 BPS. Drilling down a little further, the trade group found that subsidiaries of financial institutions saw a profit rate of almost 80 BPS compared to just 55 BPS for independent lenders.

While revenue per loan declined to $4,820 from $5,023, a bigger decline in production expenses — to $3,501 per loan from $4,475 in 2008 — was the driving force behind the improvement.

“Production profits increased in 2009 over 2008 as higher origination volumes, particularly in refinancing, reduced per-loan production expenses,” MBA Associate Vice President of Industry Analysis Marina Walsh said in the report.

Walsh added that bank and thrift subsidiaries had an advantage over independent mortgage companies because of lower loan officer compensation per loan.

Excluding secondary and warehousing income, production profits were a negative $1,628 per loan. But the latest period was an improvement from 2008, when the loss per loan was $2,291.

The improvement came despite a decline in production revenues, to $2,057 per loan in 2009 from $2,427 a year earlier. Revenues — which include origination fees, correspondent and broker fees, and other origination-related revenues — worked out to around 1.07 percent last year, falling from 1.23 percent.

But a decline in production expenses, which fell to $3,501 from $4,717, was more than enough offset falling revenues.

The respondents earned an average pre-tax profit of $4.9 million each last year, leaping from $0.7 million a year earlier. And while just 59 percent of lenders were profitable in 2008 — 96 were profitable last year.

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