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Mortgage Firms Bracing for Rise In Interest Rates

Mortgage Firms Bracing for Rise In Interest Rates By SHELLY GARCIA Senior Reporter While most of the economy stands braced for a rally, residential real estate is digging in for a reversal. Mortgage lending, expected to hit record levels this year for the second year in a row, will begin a steady decline next year, according to most projections, plummeting by as much as 200 percent, some forecast. If the projections prove true, an industry-wide consolidation would likely follow. “I believe there will be consolidation in the mortgage industry when we come out of this cycle,” said Brad Blackwell, director of the California Mortgage Bankers Association. “You’ll see companies begin to exit and consolidate with larger players as we come out of the boom.” Mortgage rates, which fell to their lowest levels in 40 years last month, have, in recent weeks, begun to inch upward. By next year, many in the industry predict rates will rise to the 6 percent range, a level that would likely slow, if not halt, demand for refinancing, which has accounted for the lion’s share of mortgage lending in recent years. The fallout would be tempered by the general conservatism in the residential real estate services sector, which has kept a cap on hiring levels, even as the volume of business has escalated. And rising interest rates would likely not put much of a crimp in the home buying market, where demand is continuing to outpace supply. Still most companies in the sector from mortgage lenders to escrow and title companies have added significantly to their payrolls by using temporary employees over the past two years, and those workers are likely to face pink slips as business declines. “So you have to say obviously it would have an impact on jobs,” said Jack Kyser, chief economist for the Los Angeles Economic Development Corp. “This has been a sector where there’s growth, and any slowdown would not be good news.” Mortgage lending, expected to reach $3.4 trillion nationally in 2003, is projected to decline 43 percent to $1.94 trillion next year and $1.46 trillion by 2005, according to the Mortgage Bankers Association of America, which anticipates a rise in interest rates to an average of 6.1 percent next year and 6.7 percent by 2005. Mostly refinancing Currently, refinancing accounts for about 75 percent of the loan originations, or more than $2.5 trillion, by most estimates. By next year, David Berson, chief economist for Fannie Mae, predicted that portion could fall 200 percent to $850 billion, according to a report published in MortgageDaily.com. “You have this large, fixed overhead in place so when the market goes away you, as a manager, are carrying this heavy debt load,” said Harry Geozian, president of Chase Financial Corp., a mortgage broker in Granada Hills. “The concern out there is we have all this capacity and there’s going to be a time when the refi market will come to a halt.” Geozian, who faced just such a situation during the last down cycle in the mid 1990s when he owned another company, structured Chase to withstand the cyclical nature of the industry by using independent contractors and a limited number at that. “From my perspective, it’s not a matter of taking advantage of a hot market,” he said. A number of companies went broke in ’94 and ’95, and I want to be a survivor.” A number of mortgage lenders are focused on building the types of relationships that will keep business coming through the door and help them gain a larger market share, even as the overall market declines. “Our business is 50 percent purchase and 50 percent refinance,” said Paul Wylie, CEO at Metrociti Mortgage LLC, a Sherman Oaks-based mortgage lender. “So we’re not as vulnerable. We’re vulnerable to the tune of 30 percent if we don’t replace it with additional business.” Metrociti hopes that the additional business will come from a growing network of relationships with real estate agents, attorneys, accountants, financial planners and home builders who would be in a position to refer clients for mortgages on home acquisitions. “In terms of forming relationships, the big guys haven’t been very successful doing that,” said Wylie. “We decided to focus on this 10 years ago. Since then, we’ve added more and more builders, realtors and accountants, whereas to large companies it’s a fraction of their business.” Wylie concedes that Metrociti, like others, has had to add employees in order to keep up with the workload of recent years, and some of those workers would likely be released. But like other companies, Metrociti has used temporary workers to fill its additional needs, keeping its core group of essential workers lean. Countrywide diversifies Officials at Countrywide Financial Services, one of the largest mortgage lenders in the business, declined to comment for this story. But Countrywide’s efforts to diversify its business beyond mortgage lending have been highly publicized. To weather the cyclical nature of the home mortgage business, Countrywide several years ago began moving into related businesses including banking and securities and the company’s goal is to build those businesses to represent 50 percent of its pre-tax profits. At the same time, Countrywide Chairman and CEO Angelo R. Mozilo pointed out in the company’s recent financial reports that it has made extensive use of technology, and hired as many as 3,000 temporary personnel in order to meet the production demands of the current mortgage market without locking Countrywide into high overhead costs for the future. “Specifically, extensive use of technology reduced the need to hire processing personnel, up to 3,000 temporary personnel were used to support production growth and can be easily downsized ,” Mozilo said in the statement. Also expected to lighten the coming bust is a continued rise in home prices, which means some homeowners will likely continue to refinance in order to pull money out of their homes, many said. Still, everyone agrees that a reduction in mortgage lending to the tune of billions and billions of dollars cannot be ignored. “The mortgage companies owned by mid-sized banks that are large enough where they need quite a bit of capital to support themselves but are too small to have economies of scale will exit,” said Blackwell. “Your mortgage brokers tend to do very well. Large lenders will continue to take market share, and smaller, niche companies will do well. It’s that mid-sized player that tends to struggle more.”

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