Lenders had plenty to celebrate last year. Mortgage originations for home purchases and refinancings both set records. But the record for refis had a dark underbelly. With loans being drained from portfolios at a record pace, investors were hit hard, and leveraged investors were hit hardest of all, getting caught up in a savage liquidity crisis in the fourth quarter (see article, page 6A).
One canny investor, Redwood Trust, foresaw the liquidity hazards and avoided the crunch (page 6A). Another big investor, IndyMac Holdings, had enough financial capability to fight its way out (see article, page 8A). Both companies, however, were hit hard in the stock market and have been redefining themselves ever since. Redwood is now originating loans for others, and IndyMac has plans to acquire or start a unit that takes deposits. Both reported recent improvements in profits.
Going a long way toward relieving the liquidity crunch were huge purchases of mortgages by Fannie Mae and Freddie Mac - about $9 billion between them in just one startling day in October.
The liquidity crunch, meanwhile, could have some long-term effects on the mortgage market. Real estate investment trusts, once seen as the next big wave of mortgage investors, have been scaling down their holdings, at least temporarily. And investors appear disenchanted with borrowing from Wall Street after receiving extensive margin calls last year. Relationship- oriented banks, they point out, did not call for more collateral.
This year, meanwhile, is shaping up as a resoundingly good one even though it will be no match for last year (see article, page 10A). Originations are expected to reach $1.2 trillion, making it the second best year on record. After three years of vitality, the housing market is expected to take a bit of a breather - perhaps a decline of 5%. Refinancings should fall even farther, bringing the whole market down by perhaps 15%.
But employment levels are expected to remain high, largely because workers were taxed last year to keep up with the extraordinary volume. While they may not be as overwhelmed this year, most of them will likely still have jobs.
Can midsize lenders survive when volume falls back to "normal?" A leading midsize lender addresses this question in a commentary (page 23), asserting that lenders must create more-targeted sales and marketing plans; must reengineer the corporate architecture to support new business models and processes; and must apply the right technology to increase efficiency and support the new architecture
Not all segments of the industry had a banner year in 1998. Home equity and subprime lenders were under strong pressure. H&R Block bought Option One in 1997 but has been having a hard time making the deal pay. Undeterred, it bought Assurance Mortgage Corp., a conventional and government lender, early this year.