Mortgage banks' net income up 74%

The Mortgage Bankers Association's 2003 Cost Study found that out of 193 mortgage banking companies surveyed, the average firm's pre-tax net income rose to $40.4 million in 2002, compared to $23.2 million in 2001. The companies that participated originated an estimated 67 percent of total residential industry volume in 2002 and serviced 63 percent of all residential loans outstanding, according to a Nov. 10 news release.

The study also reported that the record low 2002 interest rates and the refinancing wave, which began in 2001, caused aggregate purchase originations to surpass any previous year. Average company profitability surged largely due to favorable warehousing interest spreads and secondary market gains. However, one downside to high refinancing volume was in loan servicing. Due to unprecedented prepayment activity and high turnover in servicing portfolios, servicing margins dropped.

The cost study, in its 25th year of publication, analyzed trends in income, expense, productivity, and profitability for one- to four-unit residential mortgage operations through 2002. Data for this report were primarily derived from the Mortgage Bankers Financial Reporting Form, a multiagency form administered by MBA, Fannie Mae, Freddie Mac and Ginnie Mae.

Highlights of the study include:

The average net production loss (or net cost to originate a loan) was $1,000 per loan in 2002 versus $991 per loan in 2001.

The combination of net secondary marketing income, capitalized servicing and servicing release premiums produced the largest contribution to the bottom line in 2002 at $1,609 per loan.

With increased amortization and impairment of servicing rights resulting from the heavy prepayment activity in 2002, net servicing income took a hit, averaging $107 per loan in losses.

Given the high degree of churning in the average servicing portfolio, servicing expenses also rose, largely driven by increased compensation relating to temporary and overtime labor.

Servicing productivity measured as the numbers of loans serviced per servicing employee dropped to 1,068 loans in 2002 from 1,214 loans in 2001.