Spring 2006 issue of Horizons

In addition to attracting more purchase business (i.e., top line revenue growth), the cost side of the equation also must be analyzed. The challenge of managing overhead expenditures arises from the cyclical nature of the mortgage industry. It is very important that overhead costs be examined in the con- text of anticipated origination volume. In the short-term, we recommend being very deliberate in adding overhead costs. Lenders increasingly have grown accustomed to originating more loans with the same or fewer employees as the result of advances in technology. This short-term cost scrutiny, how- ever, also must be balanced against a longer-term perspec- tive that certain core employee and infrastructure costs must be incurred regardless of origination volume. During 2005, the average origination cost per loan is anticipated to increase slightly over 2004 and is projected to further increase in the upcoming year. In terms of the outlook for 2006, the consensus among the MBA, Fannie Mae and Freddie Mac economists is that origi- nation levels are projected to decline by approximately 25 percent in 2006 as compared to 2005. The composition of the projected 25 percent decrease is a decrease in refinance activity of 40 percent and a purchase origination decline of 2.5 percent. The 30-year mortgage rate is projected to increase from 6.2 percent to 6.7 percent by the end of 2006. The 2006 outlook, however, is not entirely all gloom and doom. A year ago, many of the same economists were pro- jecting a 20 percent decline in originations, and the actual 2005 numbers were much better. In addition, the projected 2.5 percent decrease in 2006 purchase originations is a somewhat modest decline. In a historical context, the project- ed 2006 purchase originations would represent the second highest level of purchase fundings ever. Even with a modest decline in the housing market and slightly higher mortgage rates, market conditions in 2006 appear relatively favorable for lenders that are able to attract purchase customers. Questions? Contact Frank Hogg, Partner-in-Charge, Mortgage Banking Services Group 314-290-3413 frank.hogg@rubinbrown.com

36 • spring 2006 issue