Fall 2007 issue of Horizons

INDUSTRy u

MORTGAGE BANKING

Originations Continue To Disappoint

purchase activity started off very poorly in early 2006 and never really recovered during the traditionally stronger spring and summer months. The biggest decrease in 2006 total origination volume came from the refinance side. Early estimates by MBA and Fannie Mae economists are that 2006 refinance levels will be down approximately 30 percent from 2005. Although mortgage rates did decline in the last quarter of 2006, the average mortgage rate during 2006 was still at its highest level in about four years. Normal rate- based refinancings of fixed-rate mortgages decreased significantly with the higher mortgage rates. Cash- out refinances and conversion of upward-adjusting adjustable-rate mortgages into fixed-rate mortgages or other loan products provided some refinance activity in 2006. We expect 2006 St. Louis refinance activity will experience a somewhat larger decrease than the forecasted 30 percent national decline. Our early projections are that St. Louis refinances will be down approximately 35 percent in 2006. Refinance activity in 2006 is expected to account for approximately 40 percent of total origination volume, down from approximately 50 percent in 2005. In addition to the lower origination levels in 2006, mortgage lenders also struggled with continued overcapacity within the industry. With the end of 2006, the industry has now completed its third full year in the post-refinance landscape. Under previous cycles, some mortgage lenders would struggle and find it increasingly difficult to survive in the years after the refinance boom. These companies would eventually fall by the wayside and reduce the amount of overcapacity within the industry. While mortgage lenders have gone out of business over the past three years, the “shakeout” appears to be at a much slower pace than in previous years. Certainly, lenders are stronger and more highly capitalized as a result of the record refinance years from 2001 through 2003. In addition, as we mentioned earlier, purchase fundings in a historical context are still relatively strong. Mortgage lenders also did a much better job in this cycle of quickly adjusting their overhead expenditures to

As expected, 2006 was a challenging year for mortgage bankers. A slowing housing market combined with a modest increase inmortgage rates resulted in a significant decrease in origination volume in 2006. Although final numbers have not yet been published, the consensus among Mortgage Bankers Association of America and Fannie Mae economists is that 2006 origination volume will be down approximately 20 percent from 2005 levels. In St. Louis, RubinBrown’s early indications are that local originations will be down approximately 30 percent in 2006. Local originations during 2006 started off very poorly and were still lackluster during the spring and summer months. Even though mortgage rates declined in the last quarter of 2006, origination activity was still disappointing. We expect that local originations for 2006 will be at their lowest level since 2000. The 20 percent forecasted decline in national originations in 2006 consists of a projected 5 percent decline in purchase activity and a projected 30 percent decline in refinance volume. Under a historical perspective, purchase business is still relatively good. The projected 5 percent decline in purchase originations to around $1.4 trillion still represents the third highest level of purchase fundings ever. In St. Louis, our early projections are that 2006 local purchases declined at a faster rate than the forecasted 5 percent national decrease. RubinBrown anticipates St. Louis purchase activity will be down approximately 10 percent in 2006. This decrease resulted from significant decreases in both new and existing home sales. Again,

37 u winter 2007 issue