End of refinancing boom jolts Countrywide Credit; mortgage banker reports record earnings as loans sag.

Countrywide Credit Industries Inc., the Pasadena-based mortgage banker which rode the mortgage refinancing wave to rise from relative obscurity to become the nation's top loan originator, is facing its biggest challenge now that the refinance wave has broken, according to industry experts.

Countrywide last month reported record earnings for the fiscal year ended Feb. 28 of $179.5 million, or $2.91 a share, up 28 percent from the year-earlier $140.1 million, or $2.48 a share.

At fiscal year-end, Countrywide had $85 billion worth of loans in its servicing portfolio, compared with $54.5 billion a year before.

But as the company announced record earnings, it also released numbers which seem to signal that the refinance market has peaked.

It reported it originated $3.9 billion in loans in February, down 7 percent from January's $4.2 billion and a decline of 22 percent from December's $5 billion.

Nationwide, as interest rates have increased, "the refinance boom is ending," said Rob Rosenblatt, director of surveys for the Mortgage Bankers Association of America in Washington, D.C.

Mortgage bankers have concentrated marketing efforts on refinance loans, while banks and savings and loans have tended to focus on home purchase loans, experts said.

Jonathan Gray, an analyst with investment firm Sanford C. Bernstein & Co. Inc., noted in a recent report that about 78 percent of Countrywide's originations were refinance loans and only 22 percent were home purchase loans in fiscal 1994.

Countrywide's dependence on refis is higher than the mortgage banker industry average of 65 to 75 percent of all loans, Gray noted.

In 1993, all lenders made $1.009 trillion in new loan originations, 55 percent of which were refinance loans, Rosenblatt said. The mortgage bankers association is projecting that in 1994 there will be $800 million in new loan originations and refis will make up only 30 percent of that smaller volume.

"It's a possibility that some mortgage banker companies could struggle if they are not prepared," Rosenblatt said. "We expect a consolidation of the (mortgage banker) industry."

Gray said, "There will be more cutbacks in the mortgage banking industry. They have already stopped hiring and they are going to start firing or spread their troops more thinly."

Currently, Countrywide has 4,697 full-time employees. When asked if the company plans layoffs because of decreased loan originations, a company official said, "We do not make projections about company performance and operations."

Mortgage banks, unlike banks and savings and loans, do not keep loans they originate in their portfolios, but rather sell them into the secondary mortgage market to agencies such as the Federal National Mortgage Association. But the mortgage bankers service the loans and receive servicing fees.

During a declining interest rate era, mortgage bankers make more money originating loans. And when interest rates are rising, they do better on loan-servicing for a number of reasons, including the fact that fewer loans leave the portfolio to be refinanced, said Thomas O'Donnell, an analyst with New York investment firm Prudential Securities Inc.

"The question is how much is the profitability (on the servicing portfolio) going to go up," he said, "and is it going to be enough to offset the decline in origination revenues?"

O'Donnell said he has a number of "concerns" about Countrywide's earnings ability, including that there has been a "significant" increase in loans in default in its servicing portfolio in recent months.

"There are people (Wall Street analysts) who are very positive on the stock," O'Donnell noted. "I'm more cautious. When you have a dropoff in originations, it's going to be hard for any mortgage banker to do well."

One analyst who is high on Countrywide without the refinance boom is Sy Jacobs, analyst with Alex Brown & Sons Inc. He issued a "strong buy" recommendation on Countrywide's stock because, he said, he believes the company will lose fewer loans in its servicing portfolio and that this lack of "run-off" will boost earnings.

Gareth E. Plank, an analyst with San Francisco-based investment firm Mabon Securities Corp., is also recommending the stock.

He said there is a "rift" among financial analysts who cover Countrywide on whether the servicing portfolio earnings will be enough to offset the lack of profits from originations.

In a period of rising interest rates, "this is where the rubber hits the road on the servicing portfolio," Plank said.