Suresh Ramakrishnan on mitigating margin compression

Suresh Ramakrishnan on mitigating margin compression.

2023 has been an extremely challenging year for the mortgage industry. Coming off a record year in 2021 and a declining market in 2022, the general expectation was for rates to rise gradually through the year with the 30-year fixed getting to around 6% by year end.

Lenders are faced with tough choices – reduce operational costs to increase margins while ensuring faster approvals and closings.

Suresh Ramakrishnan, CMB
Senior Vice President, Ascendum
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Instead, mortgage rates jumped 2.5 percentage pointsduring the first three months of the year, which was the biggest quarterlyclimb in 28 years. Rates have continued to spike, with the 30-year fixed exceeding8% in October 2023, a rate not seen since 2000! The MBA expects rates to bearound 5.5% by the end of 2024.

Housing Wire pointed out that after two record-settingyears of mortgage origination volume, the mortgage industry continuedcontracting sharply. They estimate that total origination volume in 2023 was$1.65 trillion down from $2.25 trillion in 2022 and $4.5 trillion in 2021. Bycomparison, the MBA is forecasting total volume of about $2 trillion in 2024,with gradual increases over the next two years. With higher rates and a slowinghousing market, margin compression is accelerating for lenders and servicers.

• A recentsurvey showed that the cost to originate a loan is almost $12,000! According toMBA’s Quarterly Performance Report (QPR), net production income averaged 54basis points since 2008. This production margin reached a record 203 basispoints in the third quarter of 2020, as lenders were swamped with refinancevolume. In the past three quarters, it has dropped below this historicalaverage. At under 5 basis points in first-quarter 2023, and at a loss of 5basis points in third-quarter 2023, the industry is now struggling with theperfect storm of lower volume, lower revenues, and higher costs per loan

The industry had to dramaticallyscale up in 2020 and 2021 only to have to reverse those decisions in 2022 and2023.