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Economic trends.


Prior to Iraq's invasion of Kuwait in early August 1990, the U.S. economy had been creeping along at a very slow pace of less than 2 percent at an annual rate. This slow growth was consistent with Federal Reserve policy intentions to bring about a "soft landing" of the economy - a scenario in which the economy grows at or a little below its potential growth rate of around 2 1/4 percent, unemployment does not change very much or rises very modestly and inflation drifts down. The economy seemed to be navigating this narrow path of both avoiding recession and moving toward lower inflation rates until Saddam Hussein struck.

The resulting surge in oil prices, the attendant rise in interest rates and the plunge in consumer confidence were enough to tip the scales and topple the economy into a recession. If Saddam had not initiated the invasion, we would probably not be in a recession right now; but he did, and we are.

With the war well underway, and Iraq's capability of threatening Saudi Arabian oil production facilities virtually eliminated, the threat of accelerating inflation through higher oil prices now seems unlikely. Indeed, oil prices fell sharply soon after the launching of Operation Desert Storm. Partly as a consequence, and because the economy is so weak and the Federal Reserve has been moving aggressively to reduce short-term interest rates, mortgage interest rates have come down significantly. The contract rate on 30-year fixed-rate mortgages is at the lowest level in years at around 9 1/4 percent.

Where do we go from here and what's in store for mortgage bankers? Let's review the general economic outlook, then turn to some specifics affecting mortgage banking operations.

General economic outlook - The economy is clearly weak, but the continued strength in exports, extremely well managed inventories, Federal Reserve policy actions, relatively low interest rates, improved consumer confidence coming off of very depressed levels and, hopefully, a relatively quick victory in the Persian Gulf are expected to pull the economy out of the recession by the second half of 1991. Still, as the economy struggles out of the recession, unemployment will continue to rise to around 7 percent by the end of the year, and only limited progress will be made on inflation (excluding the volatile food and energy components).

Mortgage interest rates and housing market activity - The gradual economic recovery, limited progress on inflation and relatively high interest rates abroad suggest that mortgage interest rates probably will not drop much more. Still, current levels are sufficient to stimulate housing market activity once consumer confidence improves and the economic recovery begins. After all, single-family housing starts and new home sales only totalled 755,000 units and 463,000 units, respectively, in December 1990, while existing home sales were a lackluster 3.22 million units. Consequently, although comparisons of average activity in 1990 and 1991 will probably show declines in 1991, improvement from late-1990 levels (after adjustment for normal seasonal differences) will be quite likely.

Loan production at mortgage banking companies - Even though 1991 housing market activity will likely be below the 1990 level, one- to four-family mortgage origination volume should pick up. Part of the reason is that home prices will rise, albeit very slowly. However, an even more important factor is that mortgage interest rates are lower now than they have been in years and refinancing activity has picked up sharply. This refinancing activity is likely to remain a relatively large share of business during the year.

With mortgage bankers expected to maintain a 27 percent market share in 1991 despite a modest rise in the ARM share of the market - a factor that traditionally eroded mortgage bankers' market share - mortgage companies should see a welcome rise in the dollar volume of their business in 1991.

Warehousing and marketing profitability at mortgage banking companies - Under normal circumstances, likely changes in interest rates in 1991 would bolster warehousing profitability by keeping long-term mortgage rates at relatively low and attractive levels, while lowering short-term interest rates and charges on warehouse lines of credit. However, these are not normal circumstances. Difficulties at financial institutions and increased regulation - together resulting in a "credit crunch" - may make the terms of warehouse lines of credit difficult to predict. Therefore, favorable fundamentals may not translate into increased warehousing profitability for the industry as a whole.

Marketing gains early in the year probably won't be followed by similar gains over the course of the year as interest rates stabilize. Still, sharply rising rates should not plague the market as they did at times in 1990.

Servicing at mortgage banking companies - There will clearly be some opportunities and difficulties in servicing in 1991. Sales of servicing rights will produce some good values for firms interested in acquiring servicing.

At the same time, the recession will take its toll. Rising unemployment, soft or declining home prices in some markets and debt-burdened consumers will probably lead to rising delinquencies and foreclosures in 1991. Further, higher refinancing will mean some unanticipated runoff. Faced with these problems, lenders' servicing profitability may diminish somewhat compared to 1990.

The upshot is that the mortgage banking industry will face some strong challenges in 1991, but the fundamentals are shifting toward improved conditions from those of late 1990.

Thomas M. Holloway Senior Economist
COPYRIGHT 1991 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

Article Details
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Title Annotation:economic outlook for the mortgage industry
Author:Holloway, Thomas M.
Publication:Mortgage Banking
Article Type:column
Date:Mar 1, 1991
Previous Article:Secondary market.
Next Article:Chalking up some gains.

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