Is the housing outlook still strong or do you see a weakness developing and if so, what does that mean for mortgage originations?

CAREY: Housing starts are down a little bit this year. For the overall industry, we are forecasting housing starts and therefore new home sales and existing home sales to be down in 1999. But 1998 was a record year for the housing market and it was actually the third consecutive record year. So it is hard to keep setting records.

What will that mean for mortgage lenders? Will they have to reduce their technology spending, employees, etc.?

CAREY: Business is going to be slightly less, maybe about 5% off this year, as far as the purchase market goes. And it's going to be down quite a bit more as far as refinance activity goes. That is definitely going to dry up as the year goes on. As far as the industry employment situation, it's up 100% since the beginning of the decade. Lenders did increase employment last year, and with any meaningful decline in the industry, I am sure those numbers will diminish. As to what extent, overall we are forecasting for originations to be down from $1.47 trillion in 1998 to $1.22 trillion in 1999. That is a drop of about 17%, so there is going to be less demand to support loan production. But a lot of loan officers were probably overworked last year, so I do not think the staffing down will be dramatic.

What portion of the outstanding loan volume is still refinanceable?

CAREY: There is still a lot of mortgage debt at an interest rate that is over 8%. About 25% of the mortgages outstanding right now are still refinanceable, but the likelihood that they will be refinanced is slim. A lot of that volume is in either low-balance mortgages-those almost paid off or that have such a low balance that the savings from an interest rate reduction are not going to be that great, definitely not meriting the cost of a refi. You would call this coupon burnout, where at some point in time, anyone who has a 9% mortgage and hasn't already refinanced is probably not going to, either because of a low balance or credit or collateral problems.

Is the shorter life of loans before payback a losing proposition for lenders?

CAREY: When originators originate a loan, they are basically doing it at a loss and they expect to recoup that in servicing or cross-selling. This would actually be a good environment for that. If rates stay stable, lenders will be able to recoup the original cost of those loans over time because people will not be refinancing loans. The loans will be staying in the portfolio. People will not be paying back loans quicker if rates are not changing.

How will the industry consolidation occurring last year affect the industry this year and can we expect more partnering in 1999?

CAREY: Well, there were definitely some big mergers in 1998, which increased the market share of the top 25 lenders. And there is definitely more consolidation to result as we go forward this year. It really depends on the economic and interest rate environment as to when these mergers take place.

What would need to happen?

CAREY: If interest rates rose dramatically, that would probably speed up consolidation. Right now, there has been a lot of volume out there, so there has been less urgency for lenders to want to be bought out by someone else. Everybody is doing well right now.

Do you see an eventual domination of the industry by these mega-lenders?

CAREY: There will always be a role for the niche lenders. I think a lot of the smaller to medium-size firms are producing loans and selling them to the bigger lenders. Basically, economies of scale in servicing are what's driving consolidation. The big servicers who need to replenish their portfolios and want to capitalize on economies of scale, have a large appetite for production. So a lot of smaller to medium-size lenders are really producing for the large lenders. That seems to be the way we are going.

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