Everything old is new again: lessons from the past can help lenders survive in today's much leaner market.

Author:Jenkins, TY
Position:Cover Report: Wholesale / Correspondent Lending

In the heat of summer, athletes from all over the world push themselves to perfection at the Olympic games, capturing the attention of a nation otherwise worried about rising gas prices, skyrocketing food costs and a contentious presidential election. * Sounds like a narrative from last summer's evening news? Try 1976. * In 1976, Jimmy Carter was running as the outsider against Gerald Ford, inflation was driving up food costs and unemployment concerns were putting a damper on the overall economy. * TIME Magazine's cover story on Nov. 1, 1976, called the upcoming election the "pocketbook Election" and as bad as Carter says? Is it as good as Ford contends? The answers the voters give to those questions may well swing the election, for next to the character and personalities of the candidates themselves, the mercurial, often mystifying economy has become the main issue of campaign '76." * Survey today's headlines, through, and a person could be forgiven for thinking it's the mid-1970s all over again. * Even the Federal Reserve chairman, Ben Bernanke, made the comparison in a speech to Harvard University's graduating class on June 4, saying, "Although 1975 was a pretty good year for the Red Sox, it was not a good one for" the U.S. economy. Then as now, we were experiencing a serious oil-price shock, sharply rising prices for food and other commodities, and subpar economic growth."



And that was before things really got bad with the collapse of Lehman Brothers, American International Group Inc. (AIG) and the global credit markets, requiring a $700 billion government-backed rescue plan.

The good news is the United States emerged from the recessions of the 1970s, and subsequent recessions, with even stronger economic growth. As rough as the current state of the economy seems--especially in the mortgage industry--taking a moment to remind ourselves of the basic economic lessons from the past can provide a glimpse of the future. The past holds clues to what lenders can do to survive this slump as well as what might be required to kick-start the recovery.

Business cycles through the years

Boom-and-bust cycles are nothing new to the housing industry--or any other industry, for that matter. Though the word "cycle" implies that these periods of growth and contraction are regular, the opposite is true. While periods of growth usually will be followed by periods of contraction, the duration, timing and severity of each upswing or downturn are largely unpredictable.

Before the current downturn can be evaluated on a larger scale, it helps to understand how business cycles are formed and evaluated. The typical business cycle has four distinct phases.

The peak, or boom, is a period of fast economic growth, often accompanied by increased demand and higher spending. Following the peak, though, most industries enter a period of contraction, or slump, which finds the sector reducing its output due to decreased demand. If the slump lasts long enough, an industry enters a full recession, when spending drops off, unemployment rises and economic output slows down.

However, after a period of time, industries begin to experience the final phase of the business cycle--the expansion, or recovery, where activity speeds up, spending once again increases and customer confidence bounces back.

Today's home prices paint a classic picture of the housing market in the decline phase of the cycle.

"Home prices have risen dramatically in the United States over the last 40 years," wrote Vladimir Klyuev, an economist with the International Monetary Fund (IMF), Washington, D.C., in his July 2008 report, What Goes Up Must Come Down? House Price Dynamics in the United States. "Until recently, nominal price had marched inexorably upward, with an occasional dip ... but never a year-on-year decline. Price growth accelerated in the late 1990s and peaked in the mid-2000s. Now home prices have started to fall," the report noted, although anyone in the industry is well aware of that fact.

But what surprised many was how far both home prices and loan volume have fallen. According to the National Association of Realtors[R] (NAR), Chicago, the median home price for existing-home sales in August 2007 reached $224,400. By August 2008, the median existing-home price was down to $203,100.

By the same token, in 2005, loan originations totaled nearly $3 trillion. According to the...

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