What will happen to lenders when the boom finally ends?
That was one of the hot topics during the two-day Eastern Secondary Mortgage Market Conference in Raleigh, N.C. Sept. 27-28.
Several economic forecasters at the conference concurred that rates are likely to remain low, at least through mid-1994. However, placing a timetable on something as unpredictable as interest rates can be a dangerous business and many mortgage bankers are preparing for those impending bust days well before they arrive.
The Mortgage Marketplace discussed this issue with conference attendees and found that their post-refi plans and concerns were as different as the regions they hailed from.
Assistant Vice President
Home Savings Bank,
Home Savings Bank, a thrift with several branches in eastern North Carolina, primarily in Washington and Kinston, has focused over the last few years on the conventional mortgage market. It sells most of its loans to Fannie Mae and Freddie Mac.
While refi boom profits are steady, the organization is still looking to bolster its business by venturing into new areas before its refi business loses momentum. For Home Savings Bank, the answer lies in increasing its FHA. VA and other government lending programs.
"The market has always been a purchase-driven market and only in the last few years have we actually seen refinances as a significant portion of our business," Fader said. "So we're going to work more with affordable housing and programs that will enable us to allow people to buy a home with minimal expenditures and down payments.
"We're going to lose business when the refis stop coming," he said. "Obviously, we're going to need to pick it up - we're going to do whatever it takes to be profitable."
That's already begun. Fader said Home Savings is training people in FHA and VA originations, and deals are already being made.
"The shift to an affordable housing program is a natural move for us," he said, "because as the refi boom profits start to shrink and the purchase market starts to heat up again, it's going to be a big, big part of our business. And we need to be ready for it."
Larry D. Maschhoff
President and CEO
The Bank of Illinois in Normal
Cost structures are important to Larry Maschoff, whose small bank in Normal has just ventured into the world of mortgage banking. Maschoff spent a lot of time watching the industry before his bank got involved this summer, and he believes that many people are going to suffer if they don't take a closer look at the structuring of their origination and servicing costs.
"If you're making a lot of money in this industry, the tendency is not to worry about things like cost structures," Maschhoff said. "And this refi boom has a lot of people making a lot of money. When rates go back up, that'll come to a screeching halt for a lot of them. A lot of people won't look at those things soon enough and won't make those changes - they're going to be hurt."
Bank of Illinois has people looking at these structures closely, but Maschhoff believes it has an advantage in its recent arrival in the market - it won't have to pore through mountains of old loan fies to determine the status of its origination and servicing costs are in order. "We can take a proactive approach from the start," he said.
Elliot R. Jacobs
Vice President, Mortgage Finance
Meridian Capital Markets,
Fort Lauderdale, Fla.
Meridian Capital Markets, a multirole financial conglomerate division of Meridian Bank which, among other things, buys whole and jumbo loans and performs servicing valuations and brokerings, is turning a profit and business is up. Last year, it bought more than $1 billion in loans and, said Elliot Jacobs, it'll make even more this year.
But not everything at Meridian is rosy. Its mortgage division is being forced to write down losses as a result of prepayments on purchased mortgage servicing rights. With interest rates low, it is looking cautiously at that business.
"Banks are making large profits as a result of record interest rate spreads," Jacobs said.
"But mortgage companies active in buying servicing rights are taking huge losses because of PMSRs - that's a common story with depositories that own mortgage companies, like Meridian."
Jacobs said that while the Capital Markets Group has a fee-based income division that's making money - it deals with fee incomes not related to interest rate spreads - the mortgage company is losing money. To counter that, he said, the mortgage division would take a long hard look at how it deals with PMSRs and, if losses continue, changes may not be far off.