As the mortgage banking business goes, so goes software firm Interlinq Corp.

Until recently, that simple formula has been very successful for Kirkland, Wash.-based Interlinq.

Founded in 1982 at the dawn of the personal computer revolution, the company has focused only on automating the entire process of mortgage loan production, from loan qualifying and origination to secondary marketing.

And when the home lending business boomed in the early 1990s as interest rates dropped, mortgage bankers were desperate to apply technology to get ahead of the curve in their brutally paper-intensive business.

For Big or Small Shops

Interlinq was perfectly positioned to take advantage of this trend with its MortgageWare software product line. Running on networks of PCs, it was easily adaptable to a two-person mortgage brokerage or a commercial bank processing hundreds of loan applications a month.

The company has been consistently profitable since 1990. For fiscal 1993, which ended June 30 of that year, the company reported net income of $2.6 million, or 50 cents per share, Revenues were $15.2 million, up from $9.3 million in 1992.

But its mortgage speciality has had its downside, too. Interlinq officials reported last month that because of an unexpectedly sharp decline in new business, the company would probably not meet analysts' earnings estimates of 13 cents to 15 cents per share for the fiscal 1994 fourth quarter that will end June 30.

Stock Takes a Dive

The news sent Interlinq's stock plummeting from $7 to under $4.75 a share, though it has recovered recently to around $5.50 a share.

Interlinq chairman and chief executive Robert M. Delf placed most of the blame for the downturn on the doorstep of the Federal Reserve, whose successive hikes in interest rates earlier this year quashed the refinancing boom.

"It's sort of a domino effect; rates went up too fast, and it caught most of the mortgage companies by surprise," Mr. Delf said. "They hadn't planned appropriately."

He was quick to add that he felt the mortgage slowdown was temporary. "Once they are done downsizing, they'll look at automation again," he said. "It's definitely on the front burner."

Consolidation Trend

That's not to say the mortgage business isn't consolidating apace like other sectors of the consumer financial services business, Mr. Delf said.

"We estimate there are 36,000 participants in the home lending business, including mortgage brokers, commercial banks, and thrifts," he said, adding that most of that shrinkage will come out of the smaller mortgage broker firms that tend to close up shop in market downturns.

"I don't see a whole lot of consolidation taking place in mortgage banking," Mr. Delf said, adding that he expected commercial banks to be active acquirers of mortgage companies over the next 12 months.

And while Interlinq is a leading supplier of mortgage origination software, with over 1,400 customers, there is plenty of room for growth within the market, Mr. Delf said.

"I'm not concerned about the long-term prospects for our company," he said. "I think our strategies are good, and we're making the moves we need to, such as adding to a our sales force."

The company is also investing heavily in improving and expanding its product line. Mr. Delf said one of the biggest project under way is to develop a loan servicing system, compatible with MortgageWare, that will run on a network of PCs in a systems design that has become known as client-server computing.

The servicing software will be based on Microsoft Crop.'s Windows and Windows NT operating systems, he noted.

Mr. Delf said he has high expectations for the new software, which he said should be available in early 1995. "Loan servicing is exciting because it is our first product that was designed from scratch using Windows," he said.

Mr. Delf added that until now, home loan servicing has required mainframe or minicomputer hardware, which in turn forced most small and midsize mortgage companies to outsource this function to firms like Computer Power Inc., Fiserv Inc., and Bisys Inc.

"Client-server technology makes this product a very competitive alternative to outsourcing," he claimed.

Moving to Windows

Mr. Delf said Interlinq is also moving its current MortgageWare users to a Windowsbased user interface. Its current software works with Microsoft's DOS operating system.

"There's a plan to migrate to Windows by 1995, but you have to be careful in a vertical market how you do that," he said. "We estimate there are 30,000 people in the United States who are MortgageWare experts. You can't turn their world upside down overnight."

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