Magazine article Mortgage Banking

Y2K Readiness

Magazine article Mortgage Banking

Y2K Readiness

Article excerpt

AS THIS COLUMN GOBS TO PRESS, there are just a few days to go before midnight strikes, the ball drops in Times Square and we greet the new millennium.

Are we ready? As managers, we've worked very hard to prevent service interruptions in the first days of the year 2000. But what about being ready for the long-term challenges that Y2K presents?

Last spring, a shadow fell over mortgage lenders. The refinancing boom died down, and purchase volume, though healthy, was failing to justify current capacity. By June of this year, 1998 already looked like the good old days.

An uncertain rate environment, wavering consumer confidence and rising costs began' to affect profitability seriously over the summer. And by October--traditionally a jittery month in the markets--it was clear that the Fed's "neutral" summer position on rates would probably go from a "bias" toward raising rates to actual rate hikes. Since then, the Y2K forecast for our industry has grown steadily grimmer.

Why did all this happen? I believe we simply continued to experience the paradox of prosperity. Labor shortages in a roaring economy revived fears of inflation, and in the fall, wholesale prices rose rapidly. The Fed, doing what the Fed has always done, began to tap the economy's brakes. Investors, doing what investors often do, showed signs of increasing restlessness as market volatility increased.

Analysts also began to warn of an impending consumer credit crisis--a warning that grew louder as 1999 wore on. Enjoying a steadily declining rate of delinquencies and defaults since 1994, many lenders have originated a significant number of high-LTV mortgages and have taken a stake in subprime lending in an environment marked by the lowest personal savings rate since the Depression. Up to now, the quality of mortgage loans has been protected by quickly rising home values. But historically, as interest rates have risen, home prices have fallen--a scenario for sluggish loan production and increasing delinquency.

To compound their anxiety, mortgage companies are finding it difficult to reduce costs associated with overcapacity and fixed expenses. Besides being a drain on an organization's morale, such "saves" have a way of taking longer (and costing more) than anyone expected. Economy drives must also be reconciled with other business imperatives like capital improvement. Having spent the fourth quarter of 1999 addressing these problems, many lenders are finding that their work is far from done.

In short, we're in the next business cycle--nothing new for mortgage bankers. But there are complexities and contradictions in the Y2K forecast that freshly challenge our commitment to remaining in this game.

We are finding it harder to find jump-starts now. High-LTV and subprime lending have done much in the last five years to stimulate loan production; but we can't necessarily look to this kind of lending for big boosts in the next few years. Disintermediation and commoditization of financial services and changing credit consumption patterns present another set of challenges. We find ourselves in a field of competitors who weren't there a few years ago, and we are also dealing with increasingly savvy customers. At the same time, consolidation of our industry makes it even more important for companies to operate flexibly--sometimes rather difficult to achieve overnight. …

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