Though experts have been predicting that mortgage origination volume would fall as much as 5% next year, the improved possibility now of lower interest rates could push up volume by perhaps 10%, industry observers say.

Doug Duncan, chief economist for the Mortgage Bankers Association, predicted this fall that 2001 would see at least a 5% drop in new home sales and a 3% decline in sales of existing housing, cutting mortgage volume for next year to $980 billion. The MBA says it expects the 2000 total to be about $1 trillion. The MBA, however, is revising its numbers to account for a more placid Fed and a slowing economy, Mr. Duncan said, which could spur refinancings and push up volume. The new estimates are to be released next Friday.

"We think the Fed is going to now move sooner rather than later to lower rates because the economy is slowing faster then what we had thought," he said. "We think maybe even a couple of cuts before midyear next year."

Nonetheless, Mr. Duncan remained cautious until the new projections are released. He said price appreciation has remained solid, about 2.5% for new homes and 4% for existing ones, but that this may not be enough to overcome the decline in units sold. "We expect volume to fall" unless rates drop enough to significantly boost refinancings, he said.

That may already be happening, however.

Doug W. Naidus, chief executive officer of MortgageIT.com, a New York mortgage lender, said his company is already refinancing loans it originated this year. The industry is in the midst of a mini-refinancing wave. For example, he said, loans that MortgageIT.com originated in February and March of this year, with fixed-rates of about 8.25%, can now be refinanced at 7.75%. And in the months ahead, more importantly, refinancing may be done for even less.

"That creates an opportunity for a lot of borrowers to refinance," Mr. Naidus said. "It's not a boom environment yet, but that's going to account for some opportunity." He said he would not be surprised to see projections and then actual volume levels up 10%, to as much as $1.2 trillion, next year.

"Of course it's completely predicated on rates, but there's a strong possibility that if the rate trend continues downward, then you're really talking about heavier refinance volume," he said.

But no matter what next year's volume ends up bringing to mortgage lenders, the industry may be facing a more complex and daunting problem: declining margins.

Michael McMahon, an analyst at Sandler O'Neill and Partners, said declining margins and price compression are the bigger threats to mortgage company profits. "I don't think volumes matter because margins have never been worse," he said. "It will be the third or second best year in history, but it's real bad news from the profitability side. Margins are just horrible."

Mr. McMahon said he expects that more players will be getting out of the business because their returns are not desirable. Several such announcements could come this month, he said.

Mr. Naidus said he disagrees, arguing that excess capacity has left the market and profits are back. "I think mortgage companies in general will earn larger profits on smaller revenues based upon efficiencies, such as improvements in technology," he said. "Even if there is compression on price, companies that have good technological strategies will be able to maintain their margins."

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