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Market observations.

Market Observations

Lenders around the country have modest expectations for the coming year. But, the sky is not falling, according to a sampling of industry representatives.


Things aren't as bad as all the recent crop of recession news stories imply. True, we are in a "meaningful downturn," but nothing earthshaking, and actually it is about what could be expected with the uncertainty created by Iraq, the budget battles, new taxes and the S&L crisis. But if reporters keep pushing bad news without a balanced perspective, they can make matters much worse than they are. As of now, 1991 won't be a terrific year, but it won't be a disaster either. Mortgage bankers are undertaking a number of innovations that should please the consumer and help jump start the market. But much depends upon whether the media covers the news with a balanced perspective.

TAKE A RANDOM POLL of mortgage bankers around the country, and the view expressed in the fictitious memo to the media is one you will hear time and time again.

William Corish, chairman of the board for First Virginia Mortgage Company, Falls Church, Virginia, says flatly that a recession psychology has been introduced into the public's mind. "Things would get a lot better if the Washington Post stopped writing about it," he says.

Corish's views are echoed by others in the mortgage lending business. Says Christopher E. Turner, executive vice president of Keystone Mortgage Company in Los Angeles: "The papers are making things seem far worse then they really are. They are scaring the pants off everybody. Some lenders are so scared they think they will suffer a default on every loan they make."

Indeed, spot checks with mortgage executives around the nation showed only one area--the Northeast--where times now are genuinely tough. A number of executives say the Southwest has bottomed out, is starting to come back, and may even come back strong. Few expect 1991 to be a good year and many say it won't be as good as 1990. But--unless prolonged war breaks out--they don't look for a disaster either. Many mortgage executives are optimistic about the future and anticipate a much healthier industry, and a few are trying out new market innovations.

Opinion is divided over how much a 1 point interest rate decline would help the market, and some executives see the new housing law as having a considerable impact on their lending operations.

All outlooks, of course, were contingent upon a peaceful solution to the Iraqi crisis. If war breaks out, all bets are off. Given that caveat, here's what a sampling of executives from around the nation thought in mid-November about business prospects for the near-term.

With headquarters in Philadelphia, Commonwealth Mortgage Assurance Company, a private mortgage insurer, has operations in 44 states. James C. Miller, president and chief operating officer, says his only concern at the moment is in the oil patch states, but even here he is "reasonably confident" the market won't go down any further. To help nurture the turnaround, Commonwealth plans more liberal underwriting in Texas and Oklahoma, and has default teams working with troubled borrowers. These teams attempt to find solutions to possible defaults, and sometimes offer financial assistance to worthy candidates.

Commonwealth hasn't experienced any problems in New England or New Jersey, Miller says, because the MI company pulled out at the right time. "Appraisers were saying that property would escalate at 2 percent a month without saying when, if ever, the crest would be reached. I told our officers to ignore the time-value adjustments of the appraisers' estimates, and there were a few people who didn't like our decision. Now I think they understand why," he says.

Miller doesn't expect 1991 to be as good a year as 1990. Unemployment will be higher, he believes, but non-petroleum inflation will be reduced. A decline in long-term rates of 1 percent will bring the market back to where it was before the downturn, Miller says.

Miller says that using the economist's rule of thumb definition of a recession--two consecutive quarters of declining gross national product (GNP)--the nation is not in a recession, but the economy is contracting.

Commonwealth's president says the market in Philadelphia has almost been brought to a halt because of the city's 5 percent transfer tax on residential real estate sales. Elsewhere, he notes, new residential construction in Dallas, Houston and Oklahoma is selling well even when it is more expensive than surrounding areas.

In New York City, Lisa Schwabe, vice president and division executive of mortgage banking for Chase Manhattan Bank, says volume of warehouse loans to large mortgage banks throughout the United States held pretty steady until just after August 2, when Iraq invaded Kuwait. Then there was a marked fall-off of about 25 percent, she says.

From a national perspective, Schwabe says the Northeast is the major troubled area, but that may change as "a modicum of reality" sets into sellers' minds as to the true values of their homes. She says she sees signs of a rebound in Houston and Dallas.

She thinks there won't be much change in interest rates, and that most of 1991 will be sluggish. If war comes, she says, the impact on the financial services industry will be severe if it lasts for any prolonged period of time. "The credit crunch won't get easier," she says.

Christopher R. Dunn, senior vice president at The Boston Five Cents Savings Bank, FSB, Boston, says there has been a sharp fall-off in sales, from 33 to 35 percent. Consumer confidence, he says, is nose diving, not only because of what is going on in the national and international arenas, but also because Massachusetts is having its own budget and political catharsis.

Dunn says its hard to predict what will occur next year, but that prices on existing homes have started to come down.

Barnett Mortgage Company, headquartered in Jacksonville, Florida, is picking up business from S&Ls. Their share of the pie is bigger, but the overall size of the pie is smaller, says James R. Griffiths, president. September, he says, brought a 25 percent drop in production, and Griffiths says it will be at least four to six months before the market comes back. That forecast depends, he says, on whether or not consumer confidence returns to the marketplace.

Griffiths says Barnett has 32 mortgage origination offices located in branches of Barnett Banks, Inc. throughout the state. Additionally, 590 bank branch offices have the ability to generate mortgages. In coming months, moves will be made to strengthen outreach activities by these branches. For example, Griffiths says, if a customer brings a CD to the bank, a reduced interest rate may be given on the customer's mortgage loan.

"We not only give you the mortgage, we give you the bank," says Griffiths, repeating the mortgage company's new slogan for the coming year.

Echoing Griffiths' concerns about consumer confidence, Gary Meeks, president of the Alliance Mortgage Company, says it has been the major factor in a lower volume market throughout the South. With headquarters in Jacksonville, Alliance has branch offices throughout the South and in the Mid-Atlantic states.

Meeks thinks the mortgage industry will be going through "some pretty tough times" at least partly because of the adverse impact of speculative loans in real estate.

Meeks does not look for any help from the Federal Reserve in the form of lower interest rates. "The Fed is more concerned about inflation than recession," he says, "if the Fed errs, it will err on the side of [fighting] inflation. But I think there will be a gradual decline in interest rates."

First Virginia Mortgage's Corish thinks the nation is in a recession now, and it will get much worse before it gets better. A year ago, he says, there were no delinquencies on the commercial side of his company's portfolio. Now there are about $23 million worth, all office buildings. It's the first time First Virginia Mortgage has had this problem, Corish says. "Some projects were good, but the developer's other projects failed. Some projects were no good. Three are now in Chapter 11," he says.

On the residential side, business at $40 million a month is about half of what it was last year, Corish explains. To offset the decline, Corish says major marketing efforts with new incentives will be undertaken by First Virginia in both Virginia and Maryland.

First Virginia's chairman says he hopes the practice of originating loans at below cost and then selling the servicing rights comes to an end. "This is just crazy," he says.

"Those of us who have been around for 70 years or so have a different perspective than those who have been in the business for only 10 years or so."

That's what Theodore Simson, chairman for First Investment Company, Columbus, Ohio, has to say when asked about his outlook for 1991. Simson, 73, has been through really tough times--the Depression, World War II--and what is going on today--Iraq, budget brouhahas, etc.--is in his view child's play compared to those events.

Simson's view of the future is a positive one. "You have to think positive or business will go to [pieces]," he says, adding, "if I were from New England, I wouldn't talk the way they do."

And Simson has a prescription for mortgage bankers who are having difficult times.

"You have to be a hustler. My dad was a hustler during the Depression, and while other people sat around on their rears, he hustled and made money. That's the answer," he says. As for First Investment, Simson says, "we are not retrenching."

Just the opposite. First Investment is hustling. Simson came back from the MBA convention and was surprised that only one or two mortgage bankers were trying to establish direct contact with the buyers.

So First Investment is going to try just that. Simson will be setting up a separate origination department that will canvas "for sale" signs, to see if sellers want a refinancing package or a loan on the next home.

Mortgage bankers need to understand, he says, that the consumer sees them in a different light than in the past. "Years ago, we lenders were viewed with a bit of awe--here's someone that will lend you $70,000. Now that awe is gone. We are going to have to take more steps to get to the consumer who is no longer in awe of us," he says.

Simson says that although First Investment has not had it good in the last two years, he remains optimistic. Columbus, he notes, has a very stable, diversified economy, a center of government and education. But, he says, "we had to put up with S&Ls doing crazy things until the government took them over."

J. Albert Smith, Jr., president of Banc One Mortgage Corporation in Indianapolis, says his company's volume of applications is holding up in the Midwest, with November's volume at about $100 million a month-- three fourths of it coming out of the Midwest. But, he says, new home sales are flat, and the length of time for resales on the market has lengthened to about 60 days.

"I think the nation is going into a recession, but it hasn't caught up with us in the Midwest," Smith says. He says Banc One is keeping a sharp head count, adding collections staff to keep delinquencies down and taking other steps to increase productivity.

Leonardo Aden, vice president and loan development manager in the originations division of Inter-City Mortgage Corporation, Washington, D.C., says that new and tougher documentation requirements make work cumbersome, but that they are a "blessing in disguise" because the net result will be a stronger financial community.

Resales in the District of Columbia, he says, now stay on the market for six to twelve months, and he doesn't expect that to turn around until both Realtors and sellers obtain a more realistic view of the value of property. "We need to educate Realtors, sellers and buyers," he says.

Aden thinks that there will be more instability in the market resulting from problems with S&Ls and commercial banks.

For Ron Cooper, executive vice president of Capitol Mortgage Bankers, Inc., Austin, Texas, the Texas market is holding its own. "We have bottomed out in Austin, and we are beginning to see a significant upturn in the Houston market. Dallas-Fort Worth is very steady because of many corporate relocations, and developments in Iraq may have a positive long-term impact on the Houston area," he says.

Demand in the Texas market, he says, has been steady all year, and the only problem has been an abundance of housing supply. He had anticipated that 1991 would bring an upturn, but the performance of the national economy has dimmed prospects for that outlook.

In Scottsdale, Arizona, David A. Einerson, president of Camelback Mortgage Corporation, says his market runs counter to the trends in the national economy. "We were in the doldrums the last two years, and things are a touch better now. We have been in a recession and now we are on our way out," he says. Einerson says greater Phoenix has a diversified economy with much room for growth.

The market near San Francisco, says John P. Williams, president of Modesto-based Capital Pacific Mortgage Company, is 50 percent off what it was last year.

"We run off the Bay area [economy]," he says, "when the Bay area picks up, we will. What people do is sell their homes in the Bay area for a whopping price, then come out here 60 to 90 miles away, put a large down payment on their homes, and have much lower monthly payments."

"It's slow but nothing to get alarmed about. While a house would be on the market for a month before it was sold, now it's on the market for three to six months," he explains.

Williams says the new housing law will have an impact. "In the past," he says," 60 percent of our business was government and 40 percent conventional. In the future it will be 70 percent conventional and 30 percent FHA."

In Seattle, Robert Story, president of the Seattle Mortgage Company, expects a slight reduction in residential business, but "nothing to get excited about." He predicts that 1991 will be off from 1990, but that is because 1990 was a good year.

Overall, he explains, the Seattle market is a good one and can boast a diversified economy. The city is home to Boeing, a major airplane manufacturer, and a West Coast port that's closest to the Far East. Commercial business, he says, is very good.

Joseph C. Dawson is a freelance writer and frequent contributor to Mortgage Banking. He is a former director of public affairs for the White House Office of Consumer Affairs. He also authored the book Seeking Shelter--How to Find and Finance an Energy Efficient Home.
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Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:survey of expectations for the mortgage loan industry
Author:Dawson, Joseph
Publication:Mortgage Banking
Date:Jan 1, 1991
Previous Article:Stocking a full line.
Next Article:Secondary market.

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