The biggest thing so far in 1995 has been the drop in interest rates. It's starting to bring back origination volume on both sides, purchase and refinance," says Greg Barmore, chief executive of GE Capital Mortgage Corp.

And while that's good news, Mr. Barmore warns that such volatility in interest rates makes the mortgage market hazardous in light of the new accounting rules.

"Many people are facing issues that (the new rules) are going to create," he said. "Everybody will have to put servicing on their books. And it's vulnerable to changes in value. I believe the effect of the rules will dominate financial statements for the rest of the year."

He adds that lenders are paying much more attention to how to protect themselves from impairment amortization charges. "People that don't do a good job of it will wake up one day very unhappy," he said.

He added that the cost of hedging will end up being wrapped into the price of mortgage securities.

"We have introduced much quicker refinancing," he observed. "It used to be that you refinanced when the difference in interest rates was 200 basis points. Now it's done for 25 and 50 points. So cost of providing the borrower the free option has been driven up. You either have to hedge the risk and factor it into price, or you have to find products that don't have the option built in."

The industry already has been experimenting with prepayment penalties and loans with free or low-cost conversion from adjustable to fixed rates.

For GE Capital Mortgage, Mr. Barmore said, the rate of change is very high right now, with many things driving it, not the least technology. "We're getting closer to a very quick approval process with a lot less work and bother in it," he said.

"We have to understand how change affects us, to assess our strengths, and to design strategies. Futureworld is coming at very fast speed."

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