Q & A: Growth of Technology Seen Putting Squeeze On Loan Originators

Gary Gordon, a securities analyst at PaineWebber Inc., New York, recently downgraded Countrywide Credit Industries' stock to "neutral" from "attractive." He said Countrywide's shares are near a peak price and will face some difficulties. Mr. Gordon said he expects the role of mortgage banks to decrease as the market for mortgages continues to shrink and technology impinges on the role of the classic loan originator. At the beginning of March he valued Countrywide's loan production business at $200 million, reflecting the lender's $5 billion to $8 billion in retail loan origination volume. Although Countrywide reduced staff by 40%, production volume has fallen 50%, leaving production/cost ratios swollen, he said in his report.

Mr. Gordon also noted that an accounting change could affect Countrywide's earnings, with offsetting negative effects on wholesale and correspondent production sales, which account for 75% of the lender's earnings.

The analyst gave further details in a recent interview.

Q.: Might the industry pick up with the advent of the spring homebuying season and interest rates being lower than expected?

GORDON: I'm looking at cyclical versus secular trend. Yes, spring will help them. And a number of competitors have dropped out of the business, and there are more fixed-rate loans versus adjustable originated now. So on a cyclical basis, they will do better. But I'm worried about the long term. The role of their business is shrinking rapidly due to technology.

Q.: Do you think Countrywide could use technology to its advantage and process more loans rather than replace people's jobs?

GORDON: The problem is that the purpose of technology is to squeeze out the middleman, and mortgage originators are the classic middleman. The loan business consists of a lender and a borrower. Anyone else is a middleman, and technology closes that gap rapidly.

Countrywide itself is looking to technology so you and I can do this on a computer screen, with links to our banks and employers. Computers can do more and more of this, so there is less and less room for the originator. Originators collect documents and help customers pick the loan.

I would be comfortable doing it myself, but others may want more help. Someone at a bank on the phone could do that as a part-time job. The biggest push for new technology is by Fannie and Freddie; they're the big impetus. But there is no way computers will have 100% of the jobs. We need people to provide a check, but it will be a shrunken role for sure. We believe these changes will have a profound impact on the mortgage banking business, certainly within three years.

Q.: Do you think Countrywide's large servicing portfolio may add to its value?

GORDON: Countrywide's portfolio growth rate in the past is not achievable in the future. But it will be rapid, maybe in the low to mid teens. Servicing is a growing business, but it's not cheap. If the bond market rallies, their earnings will suffer significantly, as will any servicer. Increasingly, their business is towards servicing and away from originations, and they are now more susceptible to a decline in interest rates and more protected from rising rates.

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