Two prominent mortgage executives offered some words of wisdom last week on how to tackle the industry's biggest dilemma - the low level of profitability.
Thomas Jacob, chairman and chief executive officer of Edison, N.J.-based Chase Manhattan Mortgage Corp., and Donald E. Lange, president and chief executive officer of Weyerhaeuser Mortgage Co., Woodland Hills, Calif., spoke about profitabilty and other challenges facing the industry at the Mortgage Bankers Association of America's conference for senior executives.
Mr. Jacob said one of the industry's biggest problems was that excess capacity is created when interest rates decline. He pointed out that in 1986 and 1993, rates fell enough to trigger refinancing booms. As a result, the employee count at many mortgage banks increased to handle the volume.
But when rates rose afterward, lenders used aggressive pricing tactics, at the expense of profit margins, in a bid to maintain volume and utilize the capacity.
"In 1993, the industry built capacity as if volumes were sustainable. We've been dealing with excess capacity since 1994," Mr. Jacob said.
Mr. Jacob said that the industry needs a "a collective wake up call" and has to price according to the basic economic tenets of supply and demand instead of creating excess capacity.
Mr. Lange, who is also a vice president of the trade group, said smaller mortgage companies like Weyerhaeuser have to find niches in the market if they want to prosper. Simply originating conventional loans won't cut it since it is hard to compete with larger bank-owned mortgage companies that benefit from greater economies of scale.
"The big money markets can slice you up pretty good if they're so inclined," Mr. Lange said.
He added that more mortgage lenders should look at subprime lending, originating loans to consumers with weak credit histories, since it is still a largely untapped area in which smaller lenders can find a niche. These loans generally yield higher margins as well.
Mr. Jacob predicted that in the next few years, there will be more of these niche players and that the larger mortgage bankers like Chase will get even bigger because now there are "too many players chasing too few loans."
Mr. Lange concurred, adding that because of the risk management issues associated with holding servicing rights on a balance sheet, mortgage banks would continue to sell to the larger servicers rather than try to hedge their portfolios against interest rate risk.
Weyerhaeuser's servicing portfolio is just over $4 billion. The company sold more than $5 billion of servicing rights last year. In fact, the lender's parent, the forest and paper products giant Weyerhaeuser Co., is considering the sale of the entire mortgage unit.