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Boardroom view.


The origination market is up. The origination market is down. It's a mixed bag out there, and even lenders working the same markets are reporting different stories on volume.

We polled some lenders in Virginia, California and Massachusetts using no particular scientific approach. The consensus was that builder business is hurting badly, and the jumbo market is not the one you want to be in right now. Other than that, we heard the Kuwaiti invasion provoked a steep drop in application volume in September that, for some, continued into October, as consumers recoiled from taking on new debt in the face of economic uncertainty. And while the jumbo and builder markets are stagnant, the first-time buyer now appears to be the staple of several lenders' business.

A key question we probed with our group was how their business was faring versus last year's production. We were surprised to hear from some that production was actually slightly up this year but for a variety of special reasons.

For The Boston Five Cents Savings Bank, FSB, Boston, the fiscal year ended at the end of October with overall loan volume slightly higher than the prior year. The just-closed fiscal year brought in slightly more than $1 billion in originations, roughly half from the retail operation and the balance from the wholesale business, according to Christopher Dunn, executive vice president.

But Dunn adds, "Like a lot of other lenders, we hit the wall on Labor Day." The New England lender experienced a "terrible September and October in terms of applications," he said. Whether or not it was strictly the consumer shock from the Iraq confrontation, Dunn said it was difficult to know. But the bottom line was that "we saw an abrupt impact on our market." Application volume went from roughly $30 to $35 million a month before September, to $15 to $20 million during September and October.

Dunn said he heard from other lenders around the country that the September drought in applications produced drops from 30 to 50 percent in business.

November saw some improvement in application volume, Dunn says. The upswing may be due to unusually mild weather for late fall in New England, and also may be partly tied to the significant rate drop since early September, he added. Boston Five's 30-year fixed-rate on November 27, with 1 discount point and 1 origination point, was 9 7/8 percent. That compares favorably with the 10 3/8 percent quote from early September, Dunn notes.

Boston Five's mortgage activity currently is being paced by loans to first-time buyers, Dunn says. That segment of borrowers represents more than a majority of their loans this year, he adds. "We're seeing a predominance of first-time buyers." Boston Five's average loan amount dropped during their just-closed fiscal year to $108,000 from approximately $115,000 in the year prior, according to Dunn. That partly reflects declining real estate values in the markets where the lender has its 17 branches, but it also represents the high concentration of lending in the low-end, first-time buyer market.

The New England region has seen some shifting in and out of the market of mortgage lenders and the steady presence of Boston Five has appeal to Realtors who are looking for some reliable origination outlets. Dunn says the overall origination market Boston Five serves is down about 15 to 20 percent in volume. Dunn says Boston Five is not thinking of shutting any branches but has done some consolidating. The lender is already down some staff through attrition. He adds, however, that if the September/October falloff in volume is sustained, "we will have to adjust accordingly."

Dominion Bankshares Mortgage Corporation, McLean, Virginia, saw a similar plunge in applications when Iraq invaded its neighbor in August. Starting with September, production volume was down between 30 to 35 percent versus year-earlier levels, according to John Karaszewski, president and CEO. If the invasion hadn't occurred, the CEO says volume probably would be off only about 10 to 15 percent from last year. For the year-to-date, Dominion Bankshares is down only about 3 percent from last year's level.

Karaszewski says his firm had a "pretty good August" but when the Iraq incident occurred September volume "declined greatly." He said October's business was alright, but November's volume "slid down" again. "I don't think we've recovered from that yet," he added.

On top of the drop tied to the flare-up in the Mideast, the recently enacted FHA reforms will dig still further into the regional lender's volume. Dominion does roughly 45 percent of its production in government loans, according to Karaszewski. He estimates that the higher premiums and closing cash demands of the revamped FHA program will produce a drop in his 1991 FHA volume between 10 to 15 percent.

Dominion Bankshares is also seeing volume holding up well among entry-level homebuyers, says the CEO. Karaszewski says that segment of the market is "certainly much better than the move-up buyer." The townhouse and modest single-family market is where there is business to be had, but as a result there are more lenders chasing after that type of transaction.

The smaller cities and less pricey suburbs that this lender does business in are doing very well still, says Karaszewski. These include Roanoke and Blacksburg, Virginia, as well as the less costly suburbs of Washington, D.C., such as Prince Georges County, Maryland.

Will the new slightly higher conforming limits help jump-start the middle market at all? "I don't see a whole lot more business coming in" due to the new agency purchase limit, Karaszewski said. As far as the jumbo market, business is very slow. The CEO says that there are very few sales happening for homes priced in the $270,000 to $280,000 price range. Karaszewski says those lenders who focused exclusively on the jumbo loan niche are having trouble right now. "If you are strictly involved in that, you do have a problem. It's hard to retool your branches."

With business being down, Dominion Bankshares has made some layoffs, reports Karaszewski. "We manage by the numbers and we expect our branches to support 40 loans per employee, in terms of levels of production." But the reduction in staff has focused on support staff or non-income generating staff and not loan officers, he said. Dominion used to employ one processor for every loan officer. But now it is down to one processor for every three loan officers. The prevailing management goal is to consolidate as much as possible, while still giving good coverage to the local real estate offices.

Sovran Mortgage Corporation, Richmond, Virginia, is actually seeing its mortgage volume exceed last year's in terms of dollar volume and number of originations. David Sheppard, executive vice president, says that year-to-date, Sovran has originated 13 percent more loans than at this point a year ago. In terms of dollar volume, production is up about 25 to 26 percent versus this time last year. What's the secret? Sheppard says partly it is due to several initiatives to help capture more of its bank parent's customers. One new product is designed for move-up buyers, and it takes advantages of information the bank already has on a customer from a checking account or savings account relationship to help pare down other documentation typically needed for a mortgage. Sheppard rushes to add that this product is not a "no-doc or low-doc" product. "We just tried to take away some of the hassle."

The areas where production is strong for Sovran include the Tidewater area of Virginia, and Nashville, Tennessee. Sheppard says these areas are performing well partly because they have already gone through an economic downturn and are bouncing back now. But he adds that particularly in Nashville, the volume is strong because of the quality of the producers in the branch. Roanoke, Virginia is another market that is producing well for Sovran.

Sovran's production through October has been made up of 53 percent conventional, 28 percent FHA, 12 percent VA and the rest miscellaneous bond-related production. The FHA reforms should damage his production next year, since a number of Sovran's branches are heavy producers of FHA loans. The Greensboro, North Carolina branch produces three times the FHA production as conventional originations. Also, Wilmington, Delaware branch pulls in double the FHA volume versus conventional. A number of other Sovran branches produce half their volume in FHA loans.

In Orange, California, M-West Mortgage Senior Vice President Jim West reports that builder business is "terrible and probably the hardest hit of all." M-West has five branches in Southern California, one of two based in Orange handles strictly builder business. West says that branch is a very low overhead operation staffed by a good producer, so the mortgage company is committed to keeping it for when builder business revives. In terms of overall business, the executive said that in the last few months the retail operation has seen applications drop by about 10 percent and fundings are down about 20 percent.

M-West is the new name for the old Meritor Mortgage West, which was bought from Meritor Financial by James Trepinski, former president of Meritor West and the new president of M-West. After the purchase M-West added about 16 loan officers to its existing five branches. It also doubled the number of wholesale representatives from 5 to 10, West said. Despite stronger sales power, the wholesale division's volume is down by roughly 17 percent this year. They are seeing a lot of "B and C quality paper," which they don't currently have a secondary market outlet for, West said.

West says his company is not looking at any branch closings, but they are not replacing people as they leave, with the exception of loan officers. West says the market that he has seen really cool recently is San Diego, where many local military personnel have been recruited to serve in Kuwait. All in all, today's market is a lot like 1982, West says, except with low rates and high prices versus high rates and low prices.

Janet Reilley Hewitt Editor in Chief
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Title Annotation:mortgage loan origination market
Author:Hewitt, Janet Reilley
Publication:Mortgage Banking
Article Type:column
Date:Dec 1, 1990
Previous Article:Economic trends.
Next Article:Executive compensation.

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