As a mortgage lending bonanza stretches well into its second year, William H. Lacy has some sober words for the industry: Get ready for a major shakeout.
Mr. Lacy, chief executive of Mortgage Guaranty Insurance Corp., expects industrywide originations to fall by one-third either next year or in 1995, as refinancings run out of steam. Price competition will stiffen, leaving only the most nimble of players to prosper.
Mr. Lacy, 48, is in an excellent position to size up the market. His Milwaukee-based MGIC works with several thousand lenders across the company, providing default insurance and other services. Last year, it wrote $27 billion of net new insurance, accounting for 27% of the market. That was second only to the 28% of GE Capital Mortgage Insurance.
When not pulling in business, the strapping 6-foot-2 executive often takes to the woods of Wisconsin with an ax or a hunting bow. "That's my deal," he said.
Mr. Lacy recently spoke with Phil Roosevelt of American Banker.
Q.: Let's get right to the point -- where's the mortgage market headed?
LACY: I think mortgage originations will be strong for the balance of this year. Last year we had industrywide originations of almost $900 billion, and we're on that pace again. It might not be quite as high.
Then you're setting yourself up for the next two years, and I think that's going to be a different story.
Q.: How so?
LACY: We're going to see the $900 billion market drop off dramatically.
I'd say there's a 50% probability that next year's volume will drop to $500 billion or $600 billion. If it doesn't happen in '94, the probability of its happening in '95 is about 90%.
We've had a long run here with the refinancings, but it's going to run its course. It's inevitable.
Q.: Why's that? Will interest rates rise -- or is it just that everyone who's going to refinance will already have done it?
LACY: It's a combination of both. As the economic recovery materializes, short-term rates will increase and long-term interest rates will rise, at least somewhat. Secondly, people will have restructured their debt and they won't be coming back to restructure again.
Q.: How do you suppose the industry will fare when all this happens?
LACY: I think there are going to be winners and losers. Right now, there are only winners. We're really going to test some things in the market.
Q.: Who will the losers be?
LACY: They'll be the people who haven't thought about this. They'll be people who haven't strategized and invested in their back offices to become flexible.
Q.: Who will be the winners -- the giant companies?
LACY: Size isn't a proxy for who's going to succeed. It's more tied to management, ability of the company to move, technology, commitment to business. If they've got long-term commitment, if they've got adequate capital and are well managed, this will actually be opportunity.
Q.: What do you mean?
LACY: For one thing, there may be opportunities to buy servicing over the next couple of years. Some of the other companies may have to sell servicing to cover costs.
The real good news is that when it's over and capacity in the industry has been reduced, the margins will return and home mortgage lending will be a very good business for the balance of the '90s.
Q.: Are there any especially promising growth segments in the mortgage market?
LACY: Immigrants -- you can see that in a study just issued by the Joint Center for Housing Studies at Harvard University.
It points out that the Census Bureau has increased its estimates of population growth in the 1990s by 42%, largely because of immigrant inflows. It's mainly people of Asian and Hispanic origin.
These people are going to be in rental units first, but come a few years, they're going to be looking to buy homes. A lot of the immigrants are going to be very attractive clients -- banks are going to want relationships with them.
Q.: We couldn't very well talk to a mortgage insurer without asking about delinquency. What are the trends there?
LACY: We're seeing flat delinquencies, and at a pretty low level. Of course, the exception is California.
Q.: How can the nationwide picture be so bright when the economy seems to be so sluggish?
LACY: Things are getting better in the economy. Consumers have improved their balance sheets dramatically. Their cost of debt service is way down, and the housing market is strong. For people who are in trouble or "overbought," they can put that home back in the market and cure their delinquency by selling the house.
Q.: Your biggest competitor in mortgage insurance, GE, has been pushing pretty hard into mortgage banking -- acquiring and servicing mortgages. Is that something you might do?
LACY: We don't want to get involved in mortgage banking. We don't feel it's an appropriate strategy for us.
We want to focus our capital and people on delivering services to lenders. They make the loans and service them.
Q.: What are commercial banks doing in the mortgage market these days?
LACY: We're seeing more and more of them start to hold the mortgages they produce instead of selling them. More mortgage banking subsidiaries have been told by the parent, "Deliver some of those loans to us." They'll be happy with those assets and probably want more.
Q.: What's behind the strategy?
LACY: As banks look at growing their balance sheet, which is a challenge in this kind of environment, home mortgage assets are attractive, even if it's by process of elimination. The competition they face in the credit card business and auto lending and commercial lending isn't there. Home mortgages are good assets.