What does '95 hold for mortgage market.

By the time many of you will have read this article, numerous pundits will have already written their replay of 1994 and their forecast for 1995. While it is easier to review the results of this past calendar year, the more difficult task is to predict with accuracy how the mortgage markets will fare for 1995.

To review the past, 1994 was a pivotal year in the mortgage finance sector of the Real Estate industry. Numerous lenders were reluctant to re-enter the commercial mortgage market having been scorched or burnt in the past. Others, meanwhile, were actually pursuing business, looking to place their funds at competitive rates. In the TriState area the refinancing boom carried over from 1993 to 1994 with many lenders seeking to solidify a niche in multi-family as well as being selective in their commercial loan transactions. A number of banks and other lending institutions were simultaneously seeking to do business, while restructioning old loans and attempting to divest themselves of non-performing loan pools. The more aggressive institutions carried forth their loan activities opening their doors to borrowers who had good properties and seeking to borrower at reasonable levels.

Aside from home mortgages, where the refinancing market has already peaked, the industry today is more focused on the financing of commercial properties (i.e. office buildings, shopping centers, and multi-family housing). While the statistics are scarce with respect to the actual loans made in the aggregate, it would appear from the activity levels seen in the market that the Metropolitan Banks were financing underlying co-op mortgages and underlying mortgages of multi-family rental buildings in a greater number than in the previous year and, on a selective basis, financing office and shopping center space.

While the office market has suffered a great deal by the down turn in real estate values from the late 80s, the workout of problem loans by Banks, insurance companies and foreign entities reached a frenzy in early 1994 causing many Bank Boards of Directors and Insurance Companies to diminish their interest in this sector.

The bright spot, if any, has been the recreation or the resurrection of a real estate market through the increased activity in acquisitions that has occurred this past year. Sales are increasing in commercial and multi-family properties and the buyers are aggressively looking to purchase properties, causing values to increase. Mortgage activity has therefore increased in addition to the activities generated by refinancings of existing mortgages.

Six increases by the Fed does not bode well for stability in mortgage markets. All the joy and euphoria achieved in the beginning of 1994 has been changed by the increase in rates by at least 2 percent per annum, which has changed the attitude of the industry.

1995 shall be most interesting for the mortgage market and, while the following predictions may not all be right, they certainly will not be wrong.

The Federal Reserve will lift rates in 1995 by at least 50 basis points and the 30 year long bond will exceed 8 percent. Banks and insurance companies in need of placing its funds into the market will aggressively pursue borrowers offering spreads much narrower than previously offered. A stronger real estate market for commercial properties will emerge. Many borrowers will examine floating rate adjustable mortgages as an alternative, seeking to cap exposure, utilizing interest-sensitive instruments such as swaps and caps. Loan volume on residential loans will continue to decline and many so-called mortgage bankers will seek easier ways to make money. Consolidations in this sector will continue.

Orange County, California derivative problems will be seen as more than an isolated situation. Other defaults are already occurring, causing a wider spread between debt issues of Federal Mortgage Agencies and the Treasury Market. Changes caused by the Republican majority in Washington will cause FHA, Fanny MAE and Freddie Mac to become more aggressive. CMO markets will also be adversely affected by changes in spreads, and conduits will do fewer loans this year than last.

Clearly, 1995 will be a year in which borrowers will have to rely more on the advice of seasoned Mortgage Brokers of higher repute who have strong relationships with lenders, as it will be a year that will distinguish the "Men from the Boys," or rather the "Experienced from Inexperienced."

We believe that after the Federal Reserve raises its rates, markets will stabilize and the Federal Reserve will act prudently. By the last quarter of 1995 rates will level and the institutions will work with the borrowers to give maximum dollars on their loans.

A critical question still remains. What will happen to municipalities if Washington cuts off funds and the States lower income taxes? Will that mean higher assessments or even higher real estate taxes? If so, income available for debt service will diminish and the amount of debt placed on a given property will be affected. No one can predict. Happy 1995!