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38 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T THE LATEST ORIGINATION Production Profits, Volumes Drop at Independent Mortgage Lenders Though revenues saw an increase in 2017, independent mortgage lenders witnessed a disproportionate rise in production expenses. P roduction profits for independent mortgage banks and mortgage subsidiaries in 2017 were almost half of what they were a year earlier, according to the latest MBA Performance Report. The report also revealed that production volumes were down over the year. On average, mortgage loans reaped $711 per loan in profits for independent mortgage bankers in 2017, compared to $1,346 in 2016, according to the report. Measured in basis points, the average loan's production income was 31 basis points in 2017, down from 58 in 2016. Not only was net production income down over the year but it was also substantially lower than the yearly average is 53 basis points or $1,085 per loan for the MBA's annual report since its initiation in 2008. "Production revenues per loan were up slightly for the year, as higher loan balances mitigated the effects of competitive pres- sures," said Marina Walsh, VP of Industry Analysis at MBA. "However, production expenses grew in all categories—sales, ful- fillment, production support and corporate allocations—reaching a study-high $8,082 per loan for the Annual Performance Report." This compares to production ex- penses of $7,209 per loan in 2016. Production revenues—including fee income, net secondary marking income, and warehouse spread— totaled $8,793 per loan in 2017, up from $8,555 the previous year. Overall production volume also diminished in 2017. For the indus- try as a whole, MBA estimated a decline from $2.05 trillion in 2016 to $1.71 trillion in 2017. On average, independent mort- gage banks produced 8,882 loans totaling $2.13 billion in volume in 2017, down from 11,106 loans total- ing $2.68 billion in 2016. Alongside declining production, productivity slipped over the year, with an average of 1.9 loan origina- tions per production employee per month, down from 2.4 originations per month in the previous year. Among independent mortgage banks, refinance share by dollar volume fell from 38 percent in 2016 to 25 percent in 2017. MBA estimates refi dollar volume for the industry as a whole fell from 49 percent to 35 percent. The good news for mortgage banks is balances on first mort- gage loans rose, driving mortgage servicing fees up along with them. In fact, following eight consecutive years of gains, first mortgage loan balances reached a record high for MBA's study, climbing to $245,500 in 2017, up from $244,945 in 2016. Net servicing financial income increased significantly over the year in 2017, up from $34 to $64. Net servicing financial income en- compasses net servicing operation- al income and mortgage servicing amortization gains and losses. Despite these bright spots for independent banks, declining vol- ume and profits may have taken their toll on overall profits for independent mortgage institutions. The share of firms reporting over- all pre-tax net financial profits for the year was down in 2017, falling from 94 percent to 80 percent, according to the report. Outstanding First Mortgages Rise Industry experts weigh in on the impact the increase in outstanding first mortgage balances will have. O utstanding first mortgage balance has been rising since its trough in 2013, and in February 2018 the amount reached $8.81 trillion, just a whisker away from the all-time industry high of $9.04 trillion recorded in 2008, according to data from the National Consumer Credit Trends Report by Equifax. The report highlights trends in the auto, banking, and home lending segments. Do these numbers mean that the market for first mortgages is heading the same way it did be- fore the financial crisis? Not really, according to Gunnar Blix, Deputy Chief Economist at Equifax. "Despite nearing the pre-Great Recession peak in nominal terms, the market is in a much healthier place than in 2008, with low- interest rates and normalized home prices supporting affordability," Blix said. "Borrowers are also taking ad- vantage of favorable used car prices and opportunities to consolidate high-interest debt with consumer finance loans." Outstanding first mortgage balances have added more than $1 trillion in the five years between 2013 and 2018, the report indicated. Originations on home equity also rose 11 percent between February 2017 and February 2018 with vol- umes for originations increasing by 12.3 percent during the same period. Between January and December 2017, 7.27 million first mortgages were originated representing a 13.2 percent decrease from the volumes in 2016. The report said that these dips were driven by fewer takers for refinance loans as interest rates rose. However, home equity line of credit (HELOC) volumes saw an increase during this period. HELOCs rose by 1.1 percent to nearly 1.45 million, and home equity installment loans increased by 12.3 percent to more than 700,000 in 2017. Despite the rise in home equity volumes during the year, the report indicated that home equity loan balances and outstanding accounts have actually been declining since 2007, with home equity loan balances down 65.2 percent from their peak in 2007, and accounts were down by 60.8 percent. Outstanding HELOC balances were also down 6.3 percent from a year ago at $418 billion, reflecting a decline of 38.2 percent from their peak of $677 billion in 2009.