The mortgage industry could be facing a brutal year in 1997.
A new forecast by the Mortgage Bankers Association says that loan originations will drop by about 12% next year, reaching $670 billion, just slightly better than last year's pallid $636 billion.
The association's scenario: Continued improvements in the economy will force the Federal Reserve Board to push interest rates up next month.
"My forecast is not good news," said David Lereah, chief economist for the trade group. "I presented it to large lenders last week, and their first reaction was, 'Whoa, that's going to be a difficult year.'"
"It's survival of the fittest," he added.
Mr. Lereah said he was building a rate increase of 50 basis points into his forecast, based on the expectation of a tightening by the Fed at its Aug. 20 meeting.
He believes home sales will slip and refinancings will all but disappear. Indeed, some business could shift back to the thrifts as adjustable-rate loans continue to account for about a third of the market.
David Berson, chief economist for Fannie Mae, puts his forecast for next year's loan volume at about $670 billion, though for different reasons.
"We've got a number of $750 billion for this year," said Mr. Berson. "Purchase loans should be up a little next year, to about $530 billion. But there won't be much in refinancings. The running rate of lending won't be lower next year than it is now; it's just that originations were so strong in the first half of this year."
A brief refinancing boom in the first six months pushed loan volume well above the rate of about $165 billion per quarter that now prevails.
Mr. Berson is also expecting the Fed to tighten money next month. "It's inflation insurance in case things continue stronger," he said. But afterward, he expects interest rates to ease and to continue down next year amid an enduring slackness in the economy.
In an industry that many believe continues to have substantial overcapacity, that's a doomsday scenario for some participants. It means consolidation will have to continue at a rapid pace - and that the competition for existing business should keep profit margins painfully thin.
Thomas J. Healy, director of Meridian Capital Markets, Fort Lauderdale, Fla., said that even though he basically agrees with the gloomy forecasts, he sees a silver lining for some companies. "I'm upping the valuation of servicing rights because of the slower rate of prepayments," he explained.
He said that although lenders with a good balance of originations and servicing rights should continue to do well, those heavily dependent on originations could be hit hard.
Thomas O'Donnell, a securities analyst with Smith Barney & Co., New York, said that because of "tremendous overcapacity in the mortgage industry, when you have a dropoff in volume, you have pain." He said the slump should be particularly hard on smaller portfolio lenders and on brokers, who generally depend more on refinancings than on loans to purchase homes.
Swings in interest rates have always been a two-edged sword for the mortgage business. Declining interest rates generally stimulate loan volume but also lead to heavy prepayments because of refinancings.
When rates are rising, servicing portfolios rise in value but origination volume shrivels.
Companies such as Countrywide Credit Industries, Pasadena, Calif. - the No. 1 independent mortgage company - have shown the ability to perform well in either scenario, according to analysts. But North American Mortgage Co., Santa Rosa, Calif., which has been selling most of its servicing rights as it makes the loans, will not have the servicing portfolio as an earnings cushion when lending revenues decline.
