Spring 2007 issue of Horizons

INDUSTRy u

MORTGAGE BANKING

A Poor Start for Originations Continued declines in the housing market have resulted in a disappointing start for originations. In St. Louis, RubinBrown’s indications are that local originations for the first half of 2007 will be slightly lower than the same period in 2006. We expect that local originations for the first half of 2007 will be at their lowest level since 2000. On a national basis, FannieMae and the Mortgage Bankers Association of America economists are projecting that 2007 originations will be down from 5 to 8 percent as compared to the already disappointing levels of 2006. Our early indications are that St. Louis lenders’ origination activity will be down approximately 8 to 10 percent in 2007. Unfortunately, it appears that purchase originations will be leading the decline in 2007 as both new and existing home sales remain sluggish. At this point, RubinBrown’s indications are that purchase originations in St. Louis will decline by about 10 percent in 2007. This projected double-digit decrease in purchase originations for St. Louis is consistent with the economic forecasts of many national economists.

The one bright spot in the origination landscape appears to be refinance activity. Although normal rate-based refinancings of fixed rate mortgages are practically non-existent, refinance activity in 2007 remains fairly comparable to the levels of 2006. A few economists are even projecting increases in refinance volume in 2007. Most of the current refinance activity is resulting from upward-adjusting adjustable rate mortgages converting into fixed rate mortgages or other loan products. In addition, with home equity loans remaining relatively expensive, cash-out refinancings are continuing to be popular with borrowers. The consensus of the national economists is that refinance activity in 2007 will approximate 50 percent of the total origination market, as compared to about 48 percent in 2006. We also would expect that profit margins (i.e., gain on sale percentages) will remain sluggish in 2007 as competition among mortgage lenders remains intense. There is no question that overcapacity remains an issue within the industry. Profit margins have experienced significant erosion over the past several years, and this trend will most likely continue into 2008. On the cost side, most lenders have done a relatively good job of adapting their cost structures to the current origination landscape. The key is managing overhead expenditures in the context of projected origination activity while realizing that certain core employee and infrastructure costs must be maintained in order to prosper when market conditions become more favorable.

25 u summer 2007 issue

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