Mortgage lenders’ gain on the sale of loans to the secondary market has finally increased after several quarters of declines, according to Richey May.
"Since the first quarter of 2017, we’ve seen a steady decrease in secondary gain on sale that’s made it tough for our clients to be profitable. This was the first quarter in the last 18 months where we’ve seen a change in that," Tyler House, Richey May’s manager of advisory services, said in an interview.
Gain on sale, when measured by the price a mortgage sold for in the secondary market divided by the loan’s unpaid principal balance, was more than 331 basis points in the fourth quarter of 2018, according to Richey May’s study, which primarily reflects the performance of nonbanks.
The fourth-quarter gain on sale is up 18 basis points from the third quarter, and is just 3 basis points shy of where it was during the fourth quarter a year earlier. Prior to rebounding, gain on sale had fallen to a low last seen in 2013.
While it’s tough to say exactly what might be driving the improvement, there is some speculation that lenders are starting to price their loans at more normal levels in the primary market, rather than at lower prices reflective of an imbalance between supply and demand driven by rising rates.
This would address one of several challenges lenders have been facing, but many remain.
The recent flat-to-inverted yield curve suggests to some secondary market investors that faster prepayment speeds lie ahead, and they may pay less for loans as a result, Bill Berliner, director of analytics at Mortgage Capital Trading, said in an interview.
"That really drives how premium loans get priced," he said.
Another concern persisting in the market is that even with the recent lift in rates, loan volumes and counts remain relatively low.
Overall, volume was down 3% year-to-year and originated loan count fell by 5% last year, according to Richey May.
The lower loan count is making it tough to control costs.
Spending modestly increased in all expense categories except general and administrative expenditures last year. Total operating expenses increased almost 1% and staffing levels remained unchanged. The overall cost to originate during 2018 was $8,440 per loan.
Return on equity also has been extremely low. It dropped to just over 3% from almost 17% year-over-year. That makes it the lowest it has been in the history of Richey May’s seven-year-old survey.
While the majority of mortgage lenders that participated in the consulting firm’s study found a way to generate positive net production income during the past year, 40% reported a net loss for the period.
So while the outlook for the mortgage industry is a little better than it was, it’s likely that many nonbank lenders remain under financial stress.
"You should still make sure you really run as lean an operation as possible," House said.