Spring 2006 issue of Horizons

INDUSTRY MORTGAGE BANKERS Slowdown in Originations

Originations for 2005 were surprisingly good as a result of a very strong housing market. At the beginning of 2005, the consensus among economists from the Mortgage Bankers Association of America (MBA), Fannie Mae and Freddie Mac was for 2005 originations to decline by approximately 20 per- cent as compared to the origination levels in 2004. However, both new and existing home sales set records for a fifth con- secutive year in 2005. As a result, total 2005 originations are expected to slightly exceed the total 2004 origination volume. Unfortunately, the housing market appears to have peaked in the fall of 2005, with this decline projected to continue during 2006. The consensus among economists from the MBA, Fannie Mae and Freddie Mac is that originations will decrease approximately 25 percent in 2006 as a result of the housing market cooling off. In St. Louis, RubinBrown's indications are that local origina- tions in 2005 lagged behind growth levels reached on a national basis. While 2005 national originations slightly exceeded 2004 volume, our indications are that total St. Louis originations in 2005 were down approximately 8 percent as compared to 2004. In analyzing the lag in St. Louis volume, we obviously need to distinguish between purchase and refinance activity. During 2005, total purchase originations reached $1.5 trillion according to the MBA. This total represented a fifth consecu- tive year of record purchase funding with 2005 purchase orig- inations being about 13 percent higher than purchase origi- nations in 2004. In St. Louis, RubinBrown's projections are that St. Louis purchase volume in 2005 was up approximate- ly 10 percent as compared to 2004, continuing a trend of the past several years of St. Louis lagging behind the growth of national purchase originations. The 10 percent purchase growth, however, is still much better than what was originally anticipated by most economists at the beginning of the year. Despite numerous increases in short-term rates by the Federal Reserve in 2005, longer-term rates remained rela- tively stable, with the 30-year mortgage rate increasing to 6.2 percent at the end of 2005. On a national level, refinance volume is projected by the MBA to be down approximately 12 percent in 2005. In St. Louis, our indications are that St. Louis refinance activity was down much more significant- ly, with a projected decrease of approximately 22 percent in 2005. After record refinance years of 2001 through 2003, St. Louis lenders dependent upon refinances found 2005 to be even more challenging than the difficult conditions experi- enced in 2004.

Frank Hogg, CPA

As with every cycle, lenders that prospered during the refi- nance boom are struggling to survive in the more challenging post-refinance landscape. Many of these lenders have fallen by the wayside over the past year. Even with these lenders going out of business, there is still a tremendous amount of overcapacity within the industry at the end of 2005. This over- capacity resulted in profit margins (i.e., gain on sale percent- ages) decreasing by approximately five basis points in 2005. As we go deeper into the post-refinance cycle, the overca- pacity should start improving. This process, however, can be very slow, and we anticipate that competition for the purchase customer will remain very intense in 2006. Consequently, RubinBrown is anticipating the profit margins will remain depressed in 2006 with a projected decline of approximately five basis points. As we have mentioned previously, the difference between a good year and a marginal/poor year is a lender's ability to capture purchase customers. There were a number of St. Louis lenders that experienced double-digit growth in pur- chase originations in 2005. These lenders were able to offset declines in refinance activity with growth in the purchase arena. A common characteristic of these lenders is an unwa- vering commitment of resources and energy to developing purchase relationships, even during the peak periods of the refinance boom in 2001 through 2003. In our opinion, the key for success in attracting and capturing the purchase customer remains unchanged. With competi- tion intensifying, it is very important that lenders differentiate themselves in some manner from other lenders and develop specialized niches within the marketplace. The dedication of resources and energy for business development, innovative marketing and service-oriented activities also remains critical.

35 • spring 2006 issue