FORECASTING IS A DANGEROUS GAME IN any business. It is especially dangerous in the mortgage business. This is evidenced by a glance back at production forecasts for the industry in 2002. Early production prognostications, offered during the middle of 2001, the "greatest production year ever," were for a drop in industry originations to about $1.1 trillion from the unheard-of $2 trillion run rate being experienced. At the time, the forecasts made a lot of sense. After all, wasn't everyone, their neighbors and their mother refinancing to record low rates in 2001?
As we moved closer to 2002, the crystal ball got a bit clearer, and industry pundits recognized that low rates were going to be around a little bit longer. The forecasts moved up to $1.3 trillion. Well, as everyone knows now, that forecast was eclipsed on about Aug. 15, 2002. Just when we thought we had reached the absolute maximum capacity for the industry, we managed to squeeze a few hundred billion dollars more out to our customers. It now looks like we will be closer to $2.3 trillion for 2003. Oh well, only off by a trillion dollars!
Fortunately, the difficulties of forecasting in 2002 were more than offset by the results. It may be only a bit safer to attempt to identify the most important issues facing the industry, but at least some of those issues are indisputable. The following is a short list of the issues facing mortgage banking industry participants as we move into 2003.
Production--When will the other shoe drop?
Early 2002 production forecasts were predicated on the eventual elimination of the incentive to refinance for most consumers. As all those tired people working in the industry who have forgotten their way home due to overtime logged will tell you, that incentive is still present, and consumers are still lining up to take advantage of the opportunity to refinance. Even though it seems to have lasted forever, we all know that at some point interest rates will rise and refinances will fall. Indeed, based on the length of the current refinance cycle as well as the consumers' increasing proclivity during the cycle to take equity out of their homes, when the end of the refinance cycle comes we will in all likelihood see refinance transactions drop to historic lows.
Despite continued strength in the purchase market, when the cycle turns, production will fall--and hard. At the end of past refinance cycles, it was not unusual to see production fall off 40 percent quarter...