Purchases may make it healthy year after all; Fannie Mae projects a record dollar volume for new-home loans.

How good was 1993? And how bad is 1994?

In retrospect, the trillion-dollar year in mortgage orinations may have been too much of a good thing. While volume was a loan officer's dream, heavy prepayments were a costly nightmare for many mortgage companies.

And many lenders geared up for a continuing boom in the face of universal predictions that volume would drop this year. The prevalent attitude seemed to be, "Maybe their volume out not ours."

The spike in interest rates in January and February proved to be a highly effective tourniquet for the bleeding in service portfolios. It also led to big staff cutbacks just about everywhere.

But the effects of the slump have been uneven. For the industry collectively, this year may actually turn be healthier than 1993 and set the stage for a long per sustainable growth.

The latest projection by the Federal National Mortga Association says the industry will originate $540 billion in to purchase homes this year. That would be higher than the figure for total originations in any year but 1992 or 1993, and would easily be a record for purchase money.

"Despite the rise in mortgage interest rates, affordability conditions remain at one of the best levels of all times and are still a strong driving force behind this healthy housing market," said Robert H. Elrod, president of the National Association of Realtors.

Most observers also say this will be a record year for first time homebuying,.which enriches the pool of people available for trading up in years to come. And housing starts are also running .at a record pace, which will help accelerate the chain of purchases and trade-ups.

At the same. time, the thrifts are having a banner year in originations. And many vendors to the industry are doing well despite the production slump, either because they are primarily involved in the servicing end of the business, or because they offer timely cost efficiencies when lenders are especially worried about the bottom line.

On the subject of bOttom lines, analysts and mortgage bankers have long argued that earnings from servicing would make for declines in originations.

Earnings reports for the third and fourth quarters will either prove or disprove that point. The swing factor, presumably, will be whether the savage downsizing that is still proceeding will have been savage enough.

Mortgage bankers could get a timely assist from the Financial Accounting Standards Board, which has published for comment its revised version of Rule 65, which would give an immediate boost to reported earnings for those wishing to adopt it early, an option they can hardly refuse.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER