Fannie: a refinancing bust won't end mortgage boom.

WASHINGTON - The good times in mortgage lending may keep rolling well into the next century.

That's the latest word from the Federal National Mortgage Association, the biggest player in the home loan market.

Though many mortgage bankers have been fretting about the impending end of the refinancing boom, Fannie Mae predicted that a pickup in home purchase loans would take up most of the slack.

Reasons for Growth

Mortgage originations, Fannie says, should average about $800 billion a year for the rest of the decade, some 60% higher than in any other year except 1902 and 1993.

Here's why:

* Population growth will be far stronger than originally projected by the U.S. Bureau of the Census, which has increased its estimates because of heavy immigration.

* Housing affordability, already high, will climb even higher for the next few years and stay strong for the rest of the decade as rising incomes outstrip homeprice appreciation.

* The rate of home ownership, which has slipped from its record level for the past decade, will rebound to new high ground by 2000 and perhaps much sooner, largely because of greater affordability.

A Bearish Scenario

The bullish forecasts contrasts with the warnings some analysts have been issuing in recent weeks. Jonathan Gray, a mortgage banking analyst at Sanford C. Bernstein & Co., New York, for example, expects refinancings to drop by 50% next year and another 60% in 1995 (see article, next page).

Fannie Mae's chairman, James A. Johnson, offered the agency's forecast last Wednesday, with a big supporting cast of other Fannie Mae executives, at a Washington conference for investors and analysts.

Solid originations growth clearly would help Fannie Mae, which buys and securitizes residential mortgages.

Thrifts Seen Gaining Most

It also would be good news for banks, thrifts, and other mortgage lenders. Thrifts, plagued by sluggish asset growth in the past few years, might gain the most from a pick in home purchase loans.

"We like that forecast," said Sam Lyons, senior vice president of Great Western FinancialCorp., Chatsworth, Calif., the nation's No. 2 thrift. "It supposes that purchase mortgages will be strong, and that's the name of our game."

Great Western is a national leader in mortgages for home purchases and already has been seeing strong growth in loans for newly built homes.

Mr. Lyons pointed out that Fannie Mae "has been pretty accurate in its forecasts for the last several years."

|A Great Report'

Other lenders also were heartened.

"I think it's a great report," said Stephen B. Ashley, president of the Mortgage Bankers Association of America and chairman of Sibley Mortgage Corp., Syracuse, N.Y.

"It certainly suggests a good balance of the decade for this industry - provided we do our work on direct marketing in retaining loans and learn how to reach into immigrant communities."

Mr. Ashley added that the projections were similar to those made by his group's economics staff in October. Nonetheless, the decline in refinancings will not come without pain for some market participants.

Most observers believe many of the mortgage brokers that entered the business during the present boom will disappear or shrivel and that consolidation will continue in mortgage banking, with the best-capitalized companies emerging as big winners.

Analysts' Upgrades

Fannie Mae's presentation, meanwhile, appears to have improved the agency's status on Wall Street. A day after the conference, two analysts upgraded their ratings on the company's stock to "buy" from "hold," and one initiated coverage with a "buy" recommendation.

Bruce Harting of Salomon Brothers Inc., New York, said in a research note that he was reacting to the new census data and to Fannie's reassurances that its net interest margins were not likely to shrink further.

S.G. Warburg, New York, also joined the Fannie Mae fan club. A spokesman said the firm thought there was "little to no political risk" concerning the company and that Fannie Mae was well managed and well funded.

The firm initiating coverage of Fannie was Josephthal Lyon & Ross, New York.

Secondary-Market Growth

Fannie is looking covetously at the huge piece of the primary mortgage market, about $1.5 trillion last year, that doesn't flow into the secondary market.

The agency expects the secondary market to grow 10% to 14% a year through 2000, against 7% to 9% for the primary market. And that means growth in market share for Fannie, the biggest participant.

Robert Levin, executive vice president for marketing, said Fannie had been very successful in adding new customers over the years. "This year, we've had a lot of depositories selling to us, many of them for the first time," he said.

Long-Term Strategy

Commercial banks have increasingly been selling mortgages in the secondary market. Most carry fixed rates, and portfolio lenders are reluctant to hold them but do not want to turn away business.

Some depositories are now turning to mortgage banking as a long-term business strategy, which should help Fannie achieve its market share targets.

Fannie Mae also emphasized that technology was playing a pivotal role in its expansion strategy. "Information systems are our raw materials," said Frank Raines, vice chairman. "They allow us to invent a new way of doing business."

He said Fannie would not only be able to handle much more volume without inflating expenses but also would be able to expand its product line.

On the drawing board are a number of new real estate mortgage investment conduits - or Remics - including one for adjustable - rate mortgages.

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