Loan Originations Expected to Remain on High Plateau

Article excerpt

The good news and the bad news for the mortgage industry is that loan originations should remain on a high plateau for at least two more years.

It's good news because stable high volume, rather than the seesaw pattern of the recent past, makes it much easier to run a mortgage business.

And it's bad news because - despite recent improvements - lenders are still losing money on originations and depend on servicing revenues and secondary- market sales for their profits.

But that's about the only bad news, according to industry observers and analysts. Interest rates have stabilized, and economists are expecting little change in the average mortgage rate during the next few years.

"More and more Fed watchers now believe that the Fed is either finished with the tightening cycle or will remain sidelined through early next year," said Orawin T. Velz, senior economist at Fannie Mae, in an economic commentary. "The federal funds futures markets show less than a 10% chance of a rate hike later this year or early next year."

The Fannie Mae forecast calls for an average rate of about 8.15% on 30-year fixed-rate mortgages next year, along with originations of $963 billion. The Mortgage Bankers Association in Washington is slightly more pessimistic. It expects average rates to rise to about 8.3% and originations to slip to $917 billion.

The two organizations agreed that this year's originations should end up at around $970 billion. Further, Fannie projected $1.05 trillion of originations in 2002.

The housing market is expected to remain strong and provide plenty of business to make up for skimpy refinancings. The MBA expects housing starts to fall 7.1% next year, to 1.48 million.

"We think that while the economy is going to slow, it's not going to fall apart," said Douglas Duncan, the MBA's chief economist. "The two most important factors in housing demand are growing incomes and affordability, and we think they're both favorable."

Any divergence from next year's expected mortgage rate of 8.3% would be on the downside, he said. The rate recently reached 7.9%, the lowest of the year.

The MBA expects originations to be especially strong in the coming months in Denver, Las Vegas, and such other Sun Belt cities as Atlanta; Houston and Austin; Phoenix and Tucson; and Orlando, Tampa, and West Palm Beach, Fla.

Meanwhile, the secondary market for loans is strong, bolstered in part by the demand for high-quality fixed-income securities as the Treasury Department reduces its issuance of debt. Delinquencies, the most expensive factor in loan servicing, reached a 28-year low earlier this year.

However, originations this year will be about 25% below last year's $1.29 trillion, which was the second highest on record. That is largely because of the sharp, Fed-induced rise in mortgage rates, from an average of 7.4% last year, according to industry analysts.

The origination decline has not affected all lenders equally. While originations at the big mortgage banking companies, and the big banks that operate in a mortgage-banking mode, are running at least 25% below last year's rates - and in some cases much lower - the institutions willing to hold loans in portfolio are showing far less attrition.

That is because these institutions typically specialize in adjustable-rate loans, whose volume has increased with the rise in interest rates, according to figures from National Mortgage News, an American Banker sister publication.

As of June 30, originations at Washington Mutual, the giant Seattle thrift and the nation's fifth-largest lender, were running only about 5% below last year's levels, while volume at New York's Chase Manhattan was down by about a third.

At Countrywide Credit Industries of Pasadena, Calif., first-half volume was 41% below the year-earlier level, at about $27 billion. Since then, however, business has rebounded, with monthly volume returning to levels comparable to last year's. …