The unprecedented decline in interest rates over the past few years has been a bonanza for homeowners, who have rushed to refinance mortgages at much lower rates. The decline has also meant lucrative paydays for mortgage bankers and brokers, who account for half the nation's mortgage volume. Allan Gutterman, president of Response Professional Placement Inc., a New York mortgage-banking agency, says he has "more assignments than I can physically handle."
Unfortunately, the party may be winding down. Interest rates have leveled off. And with holders of more than $1 trillion in adjustable-rate mortgages having already refinanced their mortgages, fewer homeowners will be looking to redo theirs. The Mortgage Bankers Assn. expects mortgage lending to decline from a record $1.1 trillion in 1993 to $849 billion next year, chiefly because of a big slowdown in refinancing activity (chart).
This could be good news for homeowners. Increased competition among lenders should produce better deals on loans. But it would be very bad news for mortgage bankers, many of whom depend more heavily on refinancings than on lending for new home purchases. "If you can't compete by having a low price, you're going to get killed," says Lawrence Swedroe, vice-chairman and chief economist of Prudential Home Mortgage Co., a subsidiary of Prudential Insurance Co. of America.
In the late 1980s, after mortgage rates turned around and spiked upward, many mortgage lenders and brokers went out of business, and employment in the industry dropped by 20%. But some predict the coming years will be even more painful for the nearly 200,000 people in the industry. Says Stuart Feldstein, president of SMR Research Corp. in Budd Lake, N.J.: "We have the potential for a contraction that would make that one look like a walk in the park." Feldstein thinks lending activity could fall by 50% over the next few years, and tens of thousands of mortgage bankers could lose their jobs.
Exacerbating the mortgage bankers' plight is their predilection, shared with many other financial-services companies, for staffing up in good times and cutting back when things turn bad. When rates were high and refinancings were scarce in the late 1980s, industry employment dropped from 183,000 in mid-1987 to 147,000 two years later. When rates fell and refinancings increased, the ranks of mortgage bankers swelled to 195,000 by September, 1993.
Many in the industry believe mortgage brokers would be particularly hard-hit by a drop in mortgage originations. For some, the pain has begun: Ivan Kaufman, chairman and CEO of Arbor National Mortgage Inc. in Westbury, N.Y., says some of the brokers he deals with have already seen a 30% decline in volume. What's more, many brokers are former bankers and thrift executives who have hung out shingles as mortgage brokers and could be badly hurt by a slowdown.
STANDING PAT. Some companies, however, have strategies to contend with the slowdown. Prudential Home Mortgage handles relocation programs for over 240 major corporations--a good source of new high-quality loans. It also offers affinity programs, marketing to members of the American Medical Assn., the American Dental Assn., and others. Even though Swedroe expects a downturn in lending by late 1995, he sees Prudential booking a record $45 billion in home mortgages in 1993. Similarly, Countrywide Credit Industries Inc. is opening retail offices and targeting home buyers ahead of refinancers, as well as expanding into new businesses such as mutual-fund sales.
Mortgage bankers are also hedging bets by holding on to mortgage-servicing rights. As servicers, they collect borrowers' monthly payments and handle escrow accounts. When rates are falling and refinancings booming, servicing rights lose value because the loans to be serviced often get prepaid. As rates rise, the reverse is true.
Many companies have also invested in technology and boosted productivity, improving their ability to weather a downturn. Stephen B. Ashley, incoming president of the Mortgage Bankers Assn. and chairman and chief executive officer of Sibley Mortgage Corp. in Rochester, N.Y., says his company is processing 30% more mortgages this year than last--with the same branches.
Doomsayers see the decline in mortgage lending persisting for years, because millions of homeowners with low-rate loans will feel compelled to stay put for a long time. That may be extreme, but even the more moderate forecasters see hard times ahead. Mortgage bankers who last year had their phones ringing off the hook may all too soon be twiddling their thumbs--or filling out job applications.