The mortgage industry has been through many boom-and-bust cycles in the last few decades. Now it is experiencing its biggest boom ever. Will a bust follow?
Most observers don't think so. They say they expect the present boom to continue, only slightly abated, for at least two more years, with cumulative volume for the three years approaching $4 trillion.
"This one isn't just rate-driven," said David Lereah, chief economist for the Mortgage Bankers Association. "It's economy-driven." He points to record-setting housing volume and says rates are likely to go even lower next year and stay down in 2000.
This year has been nothing short of spectacular. Volume is expected to reach almost $1.44 trillion, 44% higher than the previous record set in 1993. And a forecast by the MBA puts originations at $1.3 trillion and $1.2 trillion in the next two years.
The 1993 boom, driven by a huge wave of refinancings, proved a mixed blessing for many lenders. Some portfolios were drained of servicing rights, despite heavy origination volume. When rates surged in early 1994, volume slumped, leaving lenders with bloated staffs. And competition for the remaining business wiped out profit margins.
The result was financial disaster for many. A wave of consolidations followed, as the battered companies sought stronger partners.
But no such scenario is likely this time around, observers say. One of the big differences between 1998 and 1993 is technology.
"Many of our members are using on-line origination capability from" the government-sponsored enterprises and other vendors, said Paul Taylor, chief economist of America's Community Bankers. "A good number are using the Internet ... (to) contact the customers. The process has been streamlined. That's what has allowed organizations to stay up with the volume of refi activity at a time when purchase volume is also strong."
Fair, Isaac & Co. has seen a doubling in the use of its credit scores by mortgage lenders, an indication that the credit evaluation process is being significantly upgraded. David Shellenberger, a product manager for Fair, Isaac, said, "Scores are becoming ingrained into the origination process and the broader lending process itself. The use of scores is likely to continue to grow as lenders adopt them to optimize servicing and improve quality control."
James A. Milligan, president of Alltel Information Services of Jacksonville, Fla., concurs on the role of technology. "It seems to me, strictly anecdotally, that we've gotten through the boom without the bulge in head count. Technology has allowed us to manage through it without the trauma."
Figures from the MBA bear out Mr. Milligan's view. Industry employment reached a peak of 271,000 in March 1994, just as the bust was beginning. Currently it is at 307,000, a 13% gain over the earlier peak. But volume this year is 44% higher than in 1993.
Despite the staffing restraint, profits have not been enormous this year, but profitability has been improving steadily.
"Margins have been pretty thin on conforming loans," said Keith Gumbinger, a research executive at HSH Associates in Butler, N.J. "They have been going out the door at a little better than break-even, but they appear to have been getting better as the year progressed. The spread between 30-year mortgages and 10-year Treasuries has gotten up to 160 basis points.
Mr. Lereah of the MBA said that profitability, though not yet robust, has risen for the third year in a row.
Mr. Milligan said that operating profits of his customers appear to be strong, but that many would be taking fourth-quarter charges for impairment of their servicing portfolios. Such charges become necessary as interest rates fall, reducing the expected life of loans being serviced.
The Alltel executive also said that on the servicing side, "there has been a lot of internal progress." The use of technology for cross-selling and for portfolio retention have contributed to stronger earnings, he noted.
The ACB's Mr. Taylor said the big problem for portfolio lenders was the public's strong preference for fixed-rate loans, which the lenders are reluctant to hold. This has forced them into an investment-banking mode, selling the loans in the secondary market. The transition by the banks has been effective, Mr. Taylor said.
The heavy volume, though, may have been a bit too much for a few community banks. Mr. Taylor said, "The administrative burden in a tight labor market has forced activity to slow slightly" at some institutions. He said some smaller lenders stopped soliciting refinancings from people who were not already their customers.
Mr. Milligan pointed to one significant change in the mortgage industry that bodes well for the future.
"The large players are now talking to each other about how to share technology and reduce costs," he said.