The post-refinance landscape.

Author:Teixelbaum, Daniel
Position:Cover Report: Industry Trends

IN THE EARLY 1990s, AS COMMERCIAL REAL ESTATE SUFFERED A national downturn, Donald Trump made the famous comment that, "Whoever has cash is king." * In the oncoming post-refinance market, a similar statement will hold true for mortgage lenders. Here's our take on Trump's observation tailored for the home mortgage market: Lenders who've already created significant purchase-market share--as well as significant diversified alternative and nonmortgage revenue streams--will survive and thrive in the post-refinance market. * Since January 2001, as the mortgage industry has experienced its largest-ever refinance boom, retail and wholesale production executives across the nation have simultaneously managed two very opposing strategic processes. First, in order to handle the enormous refinance pipelines created by historically low interest rates, they've rapidly grown their infrastructures as efficiently as possible. At the same time, they've had to take a number of steps to prepare their companies for the tremendous downturn expected in the aftermath of the refinance boom. * This article focuses on answering the following question: What strategic steps have the mortgage industry's top production executives initiated over the past year to position their companies to thrive in the oncoming post-refinance market?

Mortgage Banking interviewed top retail and/or wholesale production executives at Chase Home Mortgage, Edison, New Jersey; Countrywide Home Loans Inc., Calabasas, California; Wells Fargo Home Mortgage, Des Moines, Iowa; ABN AMRO Mortgage Group Inc., Ann Arbor, Michigan; National City Mortgage Co., Miamisburg, Ohio; First Horizon Home Loan Corporation, Irving, Texas; Sun Trust Mortgage Inc., Richmond, Virginia; GreenPoint Mortgage, Novato, California; and a number of others.


Predictions for the market ahead

The Mortgage Bankers Association's (MBA's) forecast for total residential originations--expected to hit a record high $3.2 trillion in 2003--calls for a plunge to $1.5 trillion in 2004. Based on these numbers, as well as the current market landscape, production executives at leading lenders made a number of key observations.

First, lenders expected to thrive in this new, much harsher lending environment will have one or more of the following characteristics: 1) be bank-owned; 2) currently market a wide spectrum of alternative and nonmortgage products for revenue-stream diversification; 3) have access to funds for loan warehousing; 4) retain servicing; 5) currently have a great deal of liquidity and/or stronger-than-average balance sheets; 6) have a national presence and thus higher-margin products; 7) have a flat organizational chart and thus lowered origination costs; and 8) have a well-developed Internet solution already in place, both for streamlining their origination process and for in-sourcing new consumers.

Second, those interviewed anticipate that higher mortgage rates will affect the industry in three ways, through: 1) the effect of higher rates on loan origination profitability, 2) the effect of higher rates on national home sales and 3) the effect of higher rates on production market share.


Many retail lenders, if not most, likely will find it increasingly difficult to achieve significant levels of profitability for the next one to three quarters. This will be the case as they try to balance the strains of excess capacity with the maintenance of market share. In cases where lenders have parent companies either unable to stomach this period of low profitability or without cushions of alternative revenues, expect to see these lenders put up for sale and--if priced correctly--snapped up by the industry's largest lenders, especially those that are bank-based or have many nonorigination sources of revenues.

As rates stay up, lenders that have retained the most servicing should begin to become among the more stable financially. These servicing lenders will be able to slow down their amortization expenses, thus significantly decreasing their overall expenses and help cushion the concurrent revenue losses caused by higher rates.

In addition, lenders that either have bank footprints or have developed many alternative and nonmortgage sources of revenues will most easily maintain higher levels of stability. That will leave them better positioned to increase purchase market share as mortgage production revenues continue to drop.


Because rates have been so low for so long, a significant percentage of homeowners have locked into mortgages in the 5 percent range. As seen in previous post-refi markets, this may significantly slow the rate at which homeowners sell current homes to buy "move-up" homes. After all, if you're currently locked into a 5 percent mortgage, your motivation to buy a second, more expensive home with a 6 percent mortgage will be diminished.

If the economy continues to pick up steam and payrolls show some sign of reviving, this might become less of a factor as consumers will have more disposable income to potentially put into higher monthly mortgage payments.

But if the economy continues to sputter, home valuations are likely to flatten as higher rates put downward pressure on home prices. In addition, factors that tend to drive home prices...

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