Lenders had claimed they were better prepared for the end of the refinancing boom of 1998 than they had been in 1994, when refinancings fell, causing a sharp contraction in the industry. But now some are stretching their credit quality standards to vie for market share -- an ominous echo of the earlier downturn.
Industry participants say that lenders are already pricing 25 to 37 basis points more aggressively than six months ago, and the latest market survey by the Mortgage Bankers Association indicates that production is continuing to drop.
The trade group said that overall mortgage demand, including refinancings, slipped 3.3% in the week ended Sept. 17, on a seasonally adjusted basis. More importantly, purchase applications fell 4.4% to an index score of 266.4 -- a number that, until now, had been hovering around 300.
The 30-year mortgage rate has fallen from its peak of 8.31% on Aug. 13 but continues to hover around the 8% mark -- a level that is still too high to stanch the bleeding in the mortgage industry. The benchmark was at 7.94% at midweek, according to HSH Associates.
Resource Bancshares's chief financial officer, Steven F. Herbert, said most lenders are experiencing a 40% to 50% reduction in loan levels. Current interest rate levels all but promote aggressive pricing, he said.
Specialty lenders are worried that bigger players looking for volume will begin to trespass on their territory.
Bank One will be running home equity promotions in the fourth quarter. That is a natural shift in business, said its president of consumer lending, Anthony Vuoto.
"Refi activity is virtually nonexistent at this point," Mr. Vuoto said. "We're seeing a shift ... to more of the home equity lending activities in our pipeline." Mr. Vuoto said Bank One has shifted its mortgage capacity to home equity loans in response to the demand.
As for aggressive pricing, Mr. Vuoto said pressure is being felt from all sides.
"A lot of the players can't shed capacity fast enough," Mr. Vuoto said. "They are pricing to keep the volumes in the pipeline."
But Mr. Herbert says that despite evidence to the contrary, things are not as bleak as they seem for financiers in what is a very cyclical business.
"A down cycle in the mortgage industry shouldn't come as any great surprise," Mr. Herbert said. "We may see that we begin to move back into an up cycle as early as the latter part of next year, if history holds true."
Mr. Herbert pointed out that mortgages are currently being closed at or near 8%. As soon as rates go back down, those high rate mortgages are primary targets for refinancing.
"As soon as rates go back down to 7.5%, you have a whole new bunch of refis to do. Also, ARMs tend to get done in higher rate environments, which also become the first target for refinance once long-term fixed-rates become more attractive," Mr. Herbert said. "So, we are reloading the refi beast."
Mortgage Banker's chief economist, David Lereah, said that though the yearend production numbers would be high because of a record first seven months, business is not looking good for most lenders as the year winds down.
"Certainly we are going to see drops in housing activity for the remaining months and going into 2000," Mr. Lereah said as he foreshadowed problems the industry might see in the near future.
At the end of the last refi boom, 1994 industry originations were $768 billion, falling from $1 trillion the year before. Mr. Lereah said that he expects business at yearend to be around $1.2 trillion, and $900 billion in 2000, coming off of last year's high of $1.5 trillion.
"This time around, we're going to have something very similar because we are going to have a substantial drop in business," Mr. Lereah said. "The Fed has raised interest rates twice now and they may end up doing it a third time before it's all said and done. That hurts the interest sensitive sectors; the Fed is looking for the housing market to slow down."
Mr. Lereah said that company layoffs are inevitable and will build in the coming months. The Bureau of Labor Statistics reported a peak in mortgage industry employment last month, counting 375,000 brokers and bankers; but that number is expected to drop to about 300,000 or less in 2000.
"It'll become a fiercely competitive environment," Mr. Lereah said. "This is a cyclical business and most companies are accustomed to building their labor force during the ups and building it back down during the downs. The companies that are flexible and able to do it are the survivors."