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More grief from fallout.

Borrowers are going to be dropping in and out of mortgage lenders' pipelines this year as rates lurch up and down with bond market mood changes. Mortgage lenders are going to have to contend with active rate shopping and the lack of brand loyalty on the part of consumers who have absolutely no regard for the cost of hedging.

"This year, mortgage banking will face as much or more grief than ever before from fallout," says Chuck, Eshom, senior vice president of secondary marketing, Directors Mortgage Loan Corporation, Riverside, California.

Eshom notes that already since the start of this year there has been a pretty dramatic move in rates that has prompted some fairly heavy fallout. Directors saw borrowers respond to the rate drop by slipping out of earlier locks into something more attractive. On the wholesale side, where Directors usually sees borrowers lock-in for between 10 and 30 days, February registered the heavy fallout that resulted from the rate drops at the start of the year. The heavy fallout from those rate drops is expected to hit in March for retail business, where Directors' locks typically run for an average of 45 days.

Eshom says that Directors experienced an average fallout rate for all of 1992 of about 30 percent. And September was the worst month last year for fallout. The 30 percent fallout figure is the combined rate for wholesale and retail, with the wholesale side's fallout rate being higher than that. He says in a "typical" year the fallout rate is closer to between 20 percent and 25 percent. Even so, Eshom says that last year the decline in rates was more gradual so it didn't trigger the type of heavy fallout that Directors has experienced so far in the early months of 1993. He says that overall, he expects heavier fallout this year than last.

Part of what drives the fallout is the heavy media attention being given to the starkly lower mortgage rates now available. Eshom says with the consumer watching the daily press reports monitoring the movements in the bond market in response to President Clinton's economic package, there is more public awareness of where long bond rates are day by day. This prompts consumers to be more aware of a fall in rates after they lock-in a mortgage.

Directors now originates in 28 states but still has 60 percent of its production coming from California, Eshom says. Directors does half of its business via retail and the balance from wholesale. Because of the heated competition in the markets where the company originates, the prevailing practice is not to charge a fee for a lock-in even though such fees are typically credited against closing costs. Eshom says it would be unusual to charge for a lock where Directors does business and the Riverside-based lender, therefore, does not charge a fee.

In early 1992, Directors did launch a lock-in policy modification to try to prevent the refi business from displacing the more secure long-term purchase business. Eshom says his company limited the length of lock-ins for refinances to 45 days. But he says it actually ended up working against the lender because it caused processing delays, and because the firm has a relatively lenient policy on expiring lock-ins, it hurt the lender when rates were dropping.

Eshom also has seen competition heating up in Directors' lending markets. Since the first of the year, there has been "a lot more price competition," he says. As mortgage lenders see the purchase business start to heat up, they are aggressively trying to capture market share in that sector by pricing competitively to make sure they have a healthy share of originations when the refi business actually subsides. Eshom says that in many of Directors' markets--with the exception of California--consumer sentiment is improving and "even the job market is improving."

In 1992, Directors did about 60 percent of its production in refinances. Eshom says that was "a lot less than some companies." With that much of a share of production business coming from sources you cannot control, it has left mortgage lenders somewhat nervous and yearning to go back to the purchase business, where at least you can market your products and services to a familiar face that can bring you more than one loan and not be solely at the mercy of rates.

The big question now for many lenders is where will rates go for the rest of this year. Eshom says that from the level rates were at in late February "there is not necessarily a whole lot more room to go down further." He expects mortgage rates to stay in that range "with the bottom being really close to being set where rates were |then~." However, Eshom says that in mid-year, the market may see "another quarter percentage point drop--but that's all."

But the further drop in rates in early 1993 has surprised some lenders. Jerry Lister, president and chief executive officer, AMCORE Mortgage Inc., Rockford, Illinois, says, "I'm surprised that rates have gotten as low as they have out of the chute." Lister said the mortgage company asked the economic guru with his holding company at the start of the planning process for the year for an economic forecast. He says they got three different ones in succession and by the time the third one came, they tossed it out.

Lister expects rates to stay relatively flat from where they were in late February. He adds that "six months from now, I have no idea where rates will be." He notes that there is sentiment on the part of Washington, D.C. economic policymakers for rates to stay where they are, so as not to stall the recover and foster a new round of jobs losses.

In terms of how 1993 will shape up, Lister said that in December, he probably would have said it would be a tougher year for mortgage banking. But based on the first two months of 1993, Lister says, "I feel it potentially could be as good a year as last year." AMCORE Mortgage expects to exceed the production volume it posted in 1992, Lister says. One of the reasons for this is the company "has gotten serious about wholesale." In the 60 days from the start of December to the end of January, AMCORE Mortgage doubled its number of correspondents. Lister says, "Our goal is to become regional and then national."

He says there are a lot of players who have been waking up to the fact that you can gain volume a lot quicker by competing in the wholesale market. Lister says that some of the larger wholesalers have been out "buying the market" by pricing very aggressively. But he adds that to pursue this strategy, you have to be able to handle the volume and keep your service level and turnaround times attractive.

In terms of fallout, Lister says his mortgage company had an average fallout rate of 17 percent last year. He notes that one month last year, they saw their fallout ratio drop to 3 percent. The worst month was May, with a fallout rate of 24 percent.

AMCORE is one of the fortunate mortgage lenders that, to combat fallout, can charge a lock-in fee for its retail production, especially for refinances. The fee is 0.5 point and it is collected when the loan is locked in. The fee is credited against closing costs unless the borrower walks away from the commitment. Also, the lender doesn't offer anything longer than a 30-day lock for refinances. The mortgage company doesn't charge the lock fee for the wholesale business it does with its 45 correspondents, Lister says. To do so, Lister says, his correspondents tell him he'd have to consistently charge the very lowest rates on the market and he doesn't want to do that.

AMCORE did 70 percent of its production last year in refinances. The mortgage company, which is part of a multibank holding company, enjoys a 25 percent market share of the purchase business done in Rockford--its corporate headquarters. The mortgage company is extremely competitive in pricing for 30-year, fixed-rate loans and Freddie Mac 7-year and 5-year balloons. Lister says the pricing pays off because "we're getting the market we're going after."
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Title Annotation:Boardroom View; fallout in mortgage borrowers
Author:Hewitt, Janet Reilly
Publication:Mortgage Banking
Article Type:Column
Date:Mar 1, 1993
Previous Article:Financing community lending.
Next Article:The return of the purchase market.

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