2001: A year of system overload.

Author:Culver, Curt
Position:Executive Suite - Statistical Data Included

BY ALL ACCOUNTS, 2001 SHOULD stack up to be a record year in the mortgage business. It is estimated that mortgage originations topped $1.9 trillion last year. Mortgage interest rates fell to their lowest levels in years last fall, and many servicers took record-size impairment charges as prepayments soared.

A year ago in this column, I suggested that most servicers would retain 25 percent of the borrowers in their portfolio who would elect to refinance in 2001. That prediction was based on historical rates of customer retention that show retention rates rise from the mid-teens to about 25 percent in times of heavy refinancing activity. This time around, however, history proved to be a flawed barometer of the future.

The final results of 2001 aren't in just yet, but information from our multimillion loan data warehouse reveals that retention rates started the year at around 26 percent before falling (as loan volumes rose) to 16 percent in the two months ended Oct. 31, 2001. What happened? This was clearly a case of "system overload"--too many loans trying to fit into pipelines that were too small to accommodate the onslaught.

Redefining 'boom'

Past refinancing booms certainly taxed lenders' systems and staffs, but the 2001 refi binge set a new standard. Too much input caused the whole mortgage system to overload, leaving even less time for lenders to read and react. Lenders had one thing on their minds-- find and fill production capacity. Customer retention--often viewed as a strategic endeavor--couldn't find a rung on the ladder of priorities for most lenders. The demand for loans over-whelmed the industry's infrastructure, and borrowers sought alternative channels--such as the Internet and independent brokers. Both Internet and third-party originations (TPOs) set records in 2001 as retail fell to a record-low market share of roughly 30 percent.

The sheer volume of mortgages, as it usually does in refi booms, sent strategic thinking to the back burner and roll-up-your-sleeves hard work to the front burner. The high level of refinancings is expected to last into 2002, with total originations for this year approximating $1.5 trillion. In 2002, there still may not be much time for strategic thinking. But given the system overload of 2001, it might be in lenders' best interests to make the time.

In 2001, as in past refi booms, lenders continued to focus on bolstering their retail and wholesale channels. Very few servicers made a concerted...

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