Lykken on Lending

The Mortgage Bankers Association (MBA) recently unveiled its highly anticipated 2023 Q1 performance report on May 18, 2023. IMBs reported a net loss of $1,972 on each loan they originated in the first quarter of 2023. This has improved from $2,812 per loan loss in the Q4 of 2022. Marina Walsh of MBA discussed the factors for this report and the forecast for the year.

Important Links

• Mortgage Bankers Association
• Marina Walsh LinkedIn

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The MBA 2023 Q1 Quarterly Performance Report With Marina Walsh Of MBA

I’m excited to have Marina Walsh back on the show with us. The MBA released today, May 18, 2023, the latest numbers and we’re going to get into it. Also joining me on the show is Mark Helm. Mark, it’s good to have you here.

I’m glad to be here, David. Thank you.

We both respect and appreciate the MBA for all they’re doing, but specifically, one of the reasons that MBA is so special is because of you, Marina. I love how you are so diligent about bringing forth the facts of what’s going on, but I appreciate the way in which you bring them forth. You’re always trying to find a way to represent the numbers. They’re challenging numbers and you represent them in the most positive way. Welcome to the show and thank you for your wonderful, upbeat approach.

Thank you, David. Thank you, Mark.

Let’s get into it. You released the results of the first quarter’s performance report. How was the industry doing? What can we anticipate?

In this performance report, it’s important to keep in mind that this is representative of about 325 independent mortgage companies and a few subs of banks. It’s representative of one segment of our industry, but it gives a good barometer of how things look profitability-wise. We look at revenues, expenses, and net profits. The headline number is that for the fourth consecutive quarter, we are still in the red. The net production losses are at about 68 basis points. Speaking of the good news, it’s better than what we were seeing in the fourth quarter at negative 99. Needless to say, we’re still experiencing very challenging conditions right now across the board. Volume was down again in the first quarter, too.

Let’s get to the sample site. What was that number again?

About 325.

How many IMBs are there, as best you can determine? I know there’s been a lot of mergers. Some companies and mergers are going out of business. What’s the number you’re estimating right now?

I’m trying to think about what we have in our HMDA data. I can probably come up with a good estimate for that. I don’t want to throw out the wrong one. Needless to say, independents, in general, have gained a lot of shares. In terms of the overall industry right now, independents are at over 50% of both purchases as well as refinances altogether.

In terms of thousands, it depends on the year in terms of how HMDA is being reported. They change their reporting guidelines, so sometimes it’s hard to look in aggregate and to come up with a number that makes sense. In terms of share, you’re talking about over 50%. In terms of the number of companies reporting altogether, for non-depositories, there are about 881. That was as of 2021 in the HMDA reporting. That’s it altogether.

In terms of the number reporting overall, about 4,500 companies reporting altogether. There are a lot of community banks and credit unions in this space, about 1,900 community banks and 1,300 credit unions, but they don’t have a big share. The non-depositories, 881 companies, have a bigger share. Of course, the large deposit depositories, of which there are about 125.

Marina, do you think we have any revenue or cost problem still in the business, or do you think people have leveled out and figured out what they can do with their cost and now it’s the market that’s doing it to us?

In the first quarter, our revenues were actually up a bit, which was good, but with costs, we’re still trying to battle through. We’re at a new study high of over $13,000 per loan in costs overall. Part of that is due to the fact that we simply don’t have volume. Volume covers over a lot of ills when you think about it because even in some of those quarters in 2021 where we had great profits, costs were still going up on a per-loan basis. Still, we experienced incredible profits, so we were making up for it in terms of revenue.

Now we have a situation where volume is not going up and costs are going up on a per-loan basis. It’s something that needs to be controlled and it’s hard to control those costs. Your personnel make up this business. You need good personnel. You can’t simply cut and cut to the bone. A lot of independents have told me, “We’re already cut to the bone.” Some personnel you need to have on if you’re originating one loan or if you’re originating millions of loans. You still need that base. It’s tough. I think the LO compensation rules make it a little bit more challenging, too, because there’s less flexibility in terms of compensation for loan originators, but there’s no easy solution, I would say, on that cost side.

On that note, what steps are you seeing lenders taking in this tough market? We’ve seen a tremendous, unprecedented amount of layoffs and staff reductions. As you were saying, there is some fixed cost that’s unavoidable. What are some of the things that you’re seeing from the MBA’s perspective?

It runs the gamut. First of all, we are seeing mergers and acquisitions. We’re seeing consolidation. A lot of lenders are holding out hope that the other lenders will exit before they need to. We do see mergers and acquisitions. I heard from a few independent mortgage companies that we’re not looking for cost reduction. We’re looking to use this opportunity to get better sales talent. You have some independents who are willing to invest now for a better market in the future. Some companies are taking advantage of this opportunity to ramp up their sales talent. The only way they see through this is to recruit more or better.

Mortgage Bankers Association: We’re not looking for cost reduction, we’re looking to use this opportunity to get better sales talent.

That’s certainly a legitimate focus and you do that but there is an assumption in there that there is an end to this and their capital. They have a finite amount of capital, some more than others, but they’re in a place right now where they’re predicting or assuming that they have enough capital. I think of the two guys out in Alaska hiking and one guy is putting on his tennis shoes. He said, “Why are you putting on your tennis shoes?” He says, “We’re in bear country.” He says, “I want to be able to run away from the bear.” He says, “You can’t outrun a bear.” He says, “No, I’m not trying to outrun a bear. I’m trying to outrun you.”

I think that mentality out there is that all we need to do is stay ahead of the guy who’s going to get eaten behind us. As a consultant and as a coach, Mark and I are always looking for what is the right narrative that we should be passing on to our clients. I appreciate your perspective on that, and it needs insights. LO comp, you touched on a little bit. Are there any initiatives to do anything about changing LO comp? Anything that the MBA’s dishing or is this one of those untouchables, Marina, in your mind?

Certainly, there was a recent request for comments and MBA submitted a comment letter regarding changes to the LO comp rule. That happened in April 2023 and it’s out there, but it’s slow going in terms of changing that. It’s been on our agenda for many years now to get that change. Nothing is impossible. It could happen. The best we can do is to continue to advocate for that.

Going back to something you said, David, on what else are companies doing differently in terms of this cost. They’re certainly LO comp, but that’s on the policy side. A lot of our readers may say that’s beyond our control right now. That’s a longer-term vision. I’m hearing about revisiting office space and leases. Given remote work, that’s a big area. Some are investing in technology. Obviously, MBA is hoping for remote online notarization and other ways to improve the manufacturing process to cut down on costs.

We have our whole MISMO standards group. The purpose of that group is to improve efficiencies and to eventually reduce costs. I think you have a lot of companies that are revisiting what they do best in terms of their production channels, retail broker, wholesale correspondent, and consumer direct. Also, markets, analyzing demographics, population flows, looking at local markets, and what geographic makes sense.

Finally, I’ll bring in one other item. It’s servicing retention. Servicing retention has helped. We had a period of time where a lot of independents were retaining servicing for purposes of best execution. They were using a sub-servicer. We’re seeing less of that, but I have to say, the cashflows associated with servicing, given that we’re second lowest in the history of national delinquency. It has very low first quarter delinquency rates overall and no prepayment or not a lot of prepayment activity. Those servicing cashflows are certainly helping. There could be liquidity brought by an MSR sale or there’s simply that ongoing cashflow coming in. Servicing is still doing well and helping to some extent, at least, with overall profits given the unprecedented conditions on the production side.

You brought up something interesting because the MSR value is an interesting thing. I’ve been talking to a number of brokers right now and there’s a little dilemma going on because servicing is doing better than it’s ever at lower delinquencies. It’s great that no prepayments to speak of, but what is happening is that the corresponding MSR values have not been going up that much, which is frustrating for the industry. It’s a little dilemma, but what do you think about that? The MSR value is not climbing like people would expect it, considering those other factors you mentioned.

What I saw based on 2022’s results is a tremendous increase in the value of mortgage servicing. We saw valuation changes. The net servicing financial income of what I’m seeing for 2022 was the highest it’s ever been on the servicing side. Thanks to low amortization and low loan decay but also changes in the valuation and the servicing. However, that can’t continue indefinitely. Every quarter, you can’t continue to write up the value of your servicing rights.

We’re not talking about cash here. We’re talking about paper gain. This doesn’t necessarily relate to cashflows unless you sell your mortgage servicing right. I think we’re at a point where we saw some public companies have a little bit of a write-down in their servicing rights in the first quarter for a portion of their servicing portfolio.

I think that the gravy train probably is reaching the end because, at some point or another, rates are going to flatten out. We imagine that, given the Federal Reserve’s actions, we’re hoping we’re near the end of the rate hikes. At some point in time, there’s going to be a change in terms of the economy. We are still forecasting a mild recession in the second half of the year. That’ll prevent rates from continuing to rise or rate hikes on the part of the Federal Reserve.

Mortgage Bankers Association: In terms of the economy, we still are forecasting a mild recession in the second half of the year that will prevent rates from continuing to rise.

Going back to your question, Mark, on MSR valuation, what that means is we can’t see continued MSR valuation gains because I think that those were pretty spent in 2022. At least one major lender, through their public filings, announced that. I would say we are seeing a lot of transfer activity in terms of what’s happening with MSR sales.

We’ve heard from Wells Fargo, US Bank, and others that you wouldn’t have expected are not necessarily in the growth mode for servicing. There could be some strategic sales, especially given everything that’s happened with Silicon Bank, Signature Bank, and risk assessments of balance sheets for banks. It could be that banks are rethinking the portion of their balance sheet dedicated to loans held for investment as well as mortgage servicing rights. There’s going to be more decision-making, analysis, and considerations for holding loans and portfolios and also holding MSRs.

I’m looking around to see if the magazine I received had a question that relates to this. Are we seeing foundational cracks because of what’s going on in the financial industries that could wash over or ripple into the independent mortgage banking space?

Perhaps, yes. I think all banks now, again, are considering. They’re giving more thought to holding loans and portfolios and also servicing retention.

The market-to-market on their MSR is what they were holding. There has been an issue that gets back into the independent mortgage bankers are dependent on the warehouse lenders, and so many warehouse lenders that we are talking to feel very secure. They feel that they’re fine, but there’s this cloud over the whole financial regulated institution sector right now. It does cause another level of anxiety in this mix. Any more thoughts on that?

I’ll get even more thoughts after our secondary conference, where this will definitely be a topic of conversation. In terms of warehouse lenders, they got to make sure that their counterparties are viable. My assumption is that covenant violations are escalating. Profitability covenant violations are probably going up. We hear the agencies are also doing more Fannie, Freddie, and Ginny in terms of analysis with their counterpart and discussions with their counterparties, especially those that have substantial mortgage servicing rights.

Marina, do you have any idea the number of companies that are reporting HMDA data?

Yeah, plus or minus about 3,200. It depends because they’ve changed the reporting requirements for HMDA over the years. It’s right around 3,200.

Thank you. Marina, this is all such valuable information and you mentioned the MBA’s secondary conference in New York. We’re recording this on the day you released this data. Readers, let’s get a little bit of insight. What can we anticipate hearing and what’s this event going to look like there?

It’s going to be back at the Marriott Marquee, which is our signature place for the secondary and capital markets conference and expo. It’s going to be two and a half action-packed days. We’re going to have representation from all of the major agencies there. We’re going to have, of course, our signature mortgage market outlook there, headed up by my boss, our chief economist, Mike Fratantoni.

We’re certainly going to talk about the future of financial stability. That’s actually our opening session. Speaking of that, we’ll have a federal home loan bank perspective and also have some fun things like our Empower Sessions and Dave Winfield, the baseball player, will be represented there. We are mixing in a little bit of fun as well.

It’s always a great conference in a great city and it’s good to see that it’s back. I’m so excited. I encourage our readers that if you’re in the area, you go over there. Register and become a part of it. Thank you so much for being with us, Marina. It’s so good.

Thank you, David. Thank you, Mark.

Thank you.

Important Links

• Marina Walsh – LinkedIn