Rising Mortgage Delinquency Predicted

Asset quality could deteriorate in the conforming mortgage market as recent actions come back to haunt lenders, a report by Moody's Investors Service warned.

"Conforming mortgage delinquency rates are likely to increase" as some of the many borrowers who took out loans two and three years ago begin to fall behind in payments and portfolios begin to "season," the report concluded.

Lenders may also experience difficulties with the lower-income borrowers banks and others have so aggressively courted in the past two years, the rating agency said.

Any problem will be at least partially offset, the report said, by the general health of the economy and rising property values. But the warning on credit quality echoed concerns being raised throughout the consumer lending sector.

The recent pause in merger activity among mortgage lenders is expected to end soon, as large lenders clamor to broaden their product mix and obtain greater geographic reach, the report stated. "There is a lull at the moment," the report stated, but "fewer substantial independent mortgage banks will survive."

Larger mortgage companies seem especially to need to boost business through acquisitions. "Despite their efficiencies in scale and dedicated focus, these firms will also experience difficulties because of excess capacity and constant cost-management challenges," said Stanislas Rouyer, a chief analyst at Moody's and one of the report's authors.

Moody's also predicted that Fannie Mae and Freddie Mac would continue gaining clout as service providers. The companies' "overwhelming influence in the mortgage industry is likely to intensify," the report stated.

The buildup will occur as the agencies increasingly promote the use of their automated systems to underwrite loans, according to Moody's. "Depending on how these systems finally work out, the relative origination economies among different sized A-quality conforming lenders could shift, affecting the structure and value-creation dynamics of these firms."

This assessment jibes with concerns raised at the Mortgage Bankers Association's recent secondary marketing conference in San Francisco.

Executives from Fannie Mae and Freddie Mac announced plans to reduce fees for using their automated underwriting systems. Some lenders applauded the announcement, but others felt pressured, wondering how the systems would affect their operations.

Other lenders feared that the announcement was a precursor to some sort of mandate for use, but executives at both agencies say no such move is planned and that use of the systems will reduce lenders' overall costs.

The report from Moody's also predicted a continued broadening of product lines as lenders look for supplements to low-margin conventional loans.

Deeper involvement with subprime loans, high loan-to-value loans, and jumbo products are in the offing, the report stated, and will bring with them more risks for lenders.

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