Fall 2007 issue of Horizons

knowledge. commitment. value. CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

reflect the end of the refinance boom in 2003. Lenders were assisted by technological advances that allow them to operate more efficiently and with fewer employees as compared to previous cycles. Although we made the same statement last year, this overcapacity should gradually improve as we go deeper into this post-refinance cycle. Many lenders incurred operating losses over the past several years and will find it increasingly difficult to absorb these losses in the future. In the short-term, however, the story remains the same: there are still too many mortgage lenders chasing too few loans. As a result, competition among lenders continues to intensify. With this increased competition, profit margins (i.e., gain on sale percentages) have experienced significant erosion over the past several years. Our early indications are that profit margins will decline by at least 5 basis points in 2006. This projected decrease is on top of similar decreases in both 2005 and 2004. In addition to profit margins, the cost side of the equation remains important. Most lenders generally did a good job in 2003 of quickly adapting their cost structure to the post-refinance environment. Because of the cyclical nature of the industry, managing overhead expenditures can be very challenging and must be constantly monitored. These expenses must be managed based on the context of projected origination activity. Most lenders continue to be very deliberate in adding overhead costs. Given the current environment, it would be prudent to carefully scrutinize any significant increases in the level of overhead expenditures in the near future. This short-term perspective on cost containment, however, must be balanced against a longer-term “investment” in certain costs. These include investments in core employees, business development, technology and other key infrastructure costs. These investments are absolutely critical to mortgage lenders prospering when market conditions become more favorable. RubinBrown’s early indications are that the average loan origination cost per loan in 2006 will increase slightly over 2005 cost levels.

In terms of the outlook for 2007, MBA and Fannie Mae economists are projecting a decline of approximately 10 percent in origination activity during the year. Although continued decreases in estimated origination volume can be discouraging, the 2007 outlook is not entirely all gloom and doom. Mortgage rates are expected to stabilize and are forecasted by many economists to be at lower levels by the end of 2007. In addition, the projected decreases in 2007 purchase activity is relatively modest in a historical context. In our opinion, the key for success in 2007 remains unchanged. The difference between a good year and a marginal/poor year will be the lender’s ability to attract and capture the purchase customer. It is crucial for mortgage lenders to differentiate themselves in some manner from their competitors. In 2007, competition will continue to be intense and overcapacity will remain an issue within the industry. Local lenders have done a good job of establishing specialized niches within the marketplace, and this differentiation will continue to be very important in 2007. Although the cost side of the equation cannot be ignored, the focus for 2007 should be on innovative marketing, business development, specialized mortgage products, and other service-oriented activities in order to attract new purchase business in the door.

Questions? Contact Frank Hogg, CPA Partner-in-Charge, Mortgage Bankers Services Group 314-290-3413 frank.hogg@rubinbrown.com

38 u winter 2007 issue