The decline in interest rates and the resulting boom in refinancing has meant the most consistent revenue and profit growth to date between 2000 and 2003 for the U.S. mortgage industry. Mortgage IT spending, particularly for loan origination technology, also increased steadily during this time-fueled largely by the growing need to process rapidly increasing loan volumes.
However, notes new analysis from the TowerGroup, the next two years, the mortgage industry will experience a large and steady decline in lending volume -facing as much as a 50% drop in loan originations between 2003 and 2005. TowerGroup is projecting that while mortgage IT spending will continue to grow between 2003 and 2005, this growth will slow from 7% in 2003 to 1.3% in 2004.
"As the cash cow of many banks for the past three years, mortgage is the second largest IT spending category across all retail bank lines of business and had the largest dollar increase in 2003. Yet IT spending on mortgage systems is slowing and will grow just 1% for the industry overall from 2003 to 2004," said Craig Focardi, senior analyst in the Consumer Lending & Bank Cards practice at TowerGroup and author of the research. "Though increasing at a slower rate, mortgage IT spending will remain strongest during 2004 to 2005 among most 'megalenders'-growing at a healthy 12.6%. This is significantly above that 1% average in part because despite declining loan volume, these lenders can more easily realize large financial benefits in loan origination and servicing efficiency, along with portfolio analysis for outbound mortgage marketing and cross-selling initiatives."
Among the other highlights of the research:
* From 2001 to 2003, mortgage lenders invested in new or upgraded loan origination systems, wholesale website technology and automated loan fulfillment technology to reduce capacity constraints as loan volumes rose rapidly. During 2004 to 2005 most lenders will see those supply constraints disappear, as total lending volume declines by 30% to 50%.
* New IT investment will continue to be essential for all lenders. However their focus is now shifting toward areas like improving operating margins to maintain profitability, portfolio management, direct marketing and cross-selling. Retaining mortgage customers will remain a huge issue in the post-refi market, since the retention rate when mortgagors buy a home averages 10% in contrast to an average of 30% when mortgagors refinance.
* The recent wave of retail bank mergers will moderately reduce total mortgage industry IT spending-but have little effect on average IT spending by institution size, as only two of the recent mergers involved institutions that both have large mortgage operations.
TowerGroup said it also believes that recent banking industry consolidation will not have a significant impact on the concentration of the mortgage industry's assets. More significant are shifts in the drivers for mortgage industry consolidation.
While gaining economies of scale is still important for small and mid-sized banks, some large mortgage banks today are actually experiencing "diseconomies" of scale in the servicing arena, the company's analysis suggests.
