Mortgage Milestones in the Year Ahead
Mozilo, Angelo R., Mortgage Banking
When final calculations are tallied, 1998 will prove to have broken virtually every mortgage finance industry record, as combined purchase and refinance transactions exceeded the high-water mark of $1.02 trillion experienced in 1993. This accomplishment is truly a cause for celebration for everyone associated with this industry. These are indeed great times for our industry, and we can all look forward to the challenges and opportunities of the new year.
Despite turbulent financial market conditions that fueled a flight from some asset-backed securities in October, the outlook for the mortgage finance industry overall remains favorable. The fundamental strengths that contributed to 1998's positive, growth-aligned lending environment remain unchanged. Mortgage lending will continue to flourish because homeownership is ingrained in the American psyche. The country's economy continues to grow, thanks in part to low interest rates and low inflation; and I suspect the securities market turmoil will be short-lived, with the vast mortgage-backed securities market staging a healthy rebound in its growth. In short, the industry continues to operate upon a solid foundation.
The implications of these economic and cultural indicators foreshadow trends and emerging opportunities for 1999 that can be broken down into several categories.
Driven primarily by two population segments - first-time homebuyers and immigrants - the mortgage market is growing faster than the GDP. This trend should continue and be strengthened by the predictions that home loan interest rates will remain below 7 percent throughout 1999. Fannie Mae's chief economist, David Berson, stated at a recent news conference that 30-year, fixed-rate mortgages should average 6.73 percent this year. This favorable rate environment further encourages entry into the market, especially among those for whom affordability has been a barrier.
Current outstanding mortgage debt totals approximately $4 trillion, and Fannie Mae forecasts an annual growth rate between 7 and 9 percent annually. By extrapolation, we can presume that within six years mortgage loans outstanding may total more than $6 trillion. The potential opportunity for both loan originators and servicers inherent in a market this size is phenomenal. Savvy lenders will also capitalize on the vast cross-selling of financial services to be leveraged from increased servicing portfolios.
The forces driving consolidations within the financial services industry - mergers and acquisitions activity and the natural evolution of larger, more efficient business entities - will continue to be strong in 1999. Within mortgage financing, this trend signals the dominance of three types of home loan business models: megalenders, niche lenders and small, local specialists. In this view, the midsized company will find it increasingly difficult to compete.
The economies of scale, as well as technological investments necessary to remain competitive in productivity and cost, will drive the inefficient players out of the game. While inefficiency is often attributed to midsized lenders, megalenders may also underperform - particularly following mergers. …