U.S. mortgage loan originators (MLOs) reported net gains in the second quarter (Q2) of 2019. Nationally, profits averaged $1,675 per loan, according to the Mortgage Bankers Association (MBA).
The Q2 2019 report showed a significant increase from the $285 per loan profit reported in Q1 2019 and the net loss per loan reported in Q4 2018. In fact, Q2’s profits were the highest experienced in nearly three years.
MLO profits in mid-2019 were due primarily to an average reduction of $1,500 in loan production expenses, which includes of costs such as:
- MLO commissions and compensation;
- technology and equipment;
- property and insurance expenses; and
- sales and support staff.
Roughly half of that reduction was due to a $745 decrease in personnel expenses per loan. Further, the number of loans closed per production employee — including sales, fulfillment and support personnel — increased to 2.3 loans originated per employee in Q2 2019 from 1.8 loans originated per employee in the previous quarter.
This increase in production was helped along by a significant increase in loan volume, as the average number of loans closed per company was 2,312 in Q2 2019, up from 1,571 in the previous quarter.
It comes back to interest rates
During Q2 2019, the average interest rate on a 30-year fixed rate mortgage (FRM) in California declined from 4.09% in April to 3.92% in June.
As mortgage interest rates have continued their decrease in Q3 and thus far into Q4, expect mortgage lender reports to show profits through the rest of 2019. For perspective, the average 30-year FRM rate in California was 3.7% in October 2019, down a full percentage point from a year earlier when it was 4.7%.
This decline means buyer purchasing power has increased significantly, by roughly 10% over the course of a year. This increase in purchasing power has buoyed homebuyer confidence and helped to keep home prices afloat in 2019, despite falling home sales volume.
MBA forecasts mortgage origination amounts will decrease roughly 8% in 2020. They point to slowing price growth in 2019, which they expect to continue over “the next few years.”
What the MBA report does not mention is 2019’s trend of consistently high spread between the 10-year Treasury Note and the 30-year FRM rate. When the spread is low, it indicates lenders are willing to accept a lower return on their investment. When the spread is high, lenders are padding their risk premiums in anticipation of a market slowdown.
Today’s spread is significantly higher than historical standards, at 2.0 percentage points in October 2019 compared to around 1.55 points historically. Mortgage lenders are preparing for the housing slowdown that began in 2018 to continue in 2020 with the arrival of the next recession, at which point the mortgage market will slow.
Ironically, the biggest influence on 2019’s declining FRM rates that have buoyed lender profits is the bond market’s anticipation of Federal Reserve (Fed) moves to decrease rates in preparation for the coming recession, anticipated to arrive in 2020. Today’s profits herald tomorrow’s slowdown. Thus, forward-looking mortgage and real estate professionals will put away 2019’s profits for the lean years ahead.