From Boom to Bust to ... What?

The decade that just ended was the richest one on record for mortgage bankers: $25 trillion in originations, billions in origination fees - and record profits. Of course, all those "record profits" have reversed themselves, and with the housing market in a depression (in some parts of the country) the immediate future hardly looks bright.

Then again, before any industry can bounce back it must first find a floor, which is hopefully what's occurring now. Continued high unemployment will only prolong the process. Low mortgage rates will help.

As a whole, 2009 wasn't all that bad when it came to loan production: $1.9 trillion in new fundings with 70% of that refinancings.

Depending on who you believe, the new year is looking like a nail biter or maybe it won't be so awful. The Mortgage Bankers Association, which in years past has tended to be a bit on the optimistic side when it came to forecasting, thinks the industry will fund just $1.3 trillion in originations. Freddie Mac, on the other hand, looks like the poster child for Pollyanna: $1.75 trillion. (We're waiting to hear from Fannie Mae.) We won't know until yearend who was actually right but as these things go the true answer likely will be in the middle. Or maybe not.

As always, two factors determine residential originations: interest rates and unemployment. That's what it comes down to. Profits are shaped by not only mortgage rates but a lender's cost of funds. As noted in previous columns, the profit margin equation looks promising for the year ahead.

As 2010 progresses it will be great for lenders to have wide profit margins, but after a while reality will set in. A CEO can tell his board that the company is earning $900 per loan, but when the firm is only funding half of what it did a year ago, that's when the trouble starts.

And when the trouble starts the question then becomes: Who will suffer more - big retail lenders like Wells Fargo, Bank of America and Chase, or the small- to medium-sized shops?

Marc Savitt, a past president of the National Association of Mortgage Bankers, argues that lower volumes this year might actually save brokers. He sees a scenario where the nation's mega-banks could start trimming expenses rapidly, resulting in branch closings and staff reductions. "The only way to keep up their volumes will be to use brokers," he said. "Remember: brokers only get paid if they produce."

In theory, Mr. Savitt - who not only runs a small brokerage in West Virginia but recently launched a new trade group for real estate professionals - is right. And if he's right, that means we should see more lenders (depositories and nonbanks alike) enter the wholesale channel. So, I asked Mr. Savitt if more wholesalers, are, in fact, jumping in. His response: "I haven't seen any enter yet but there's talk of it."

Like Mr. Savitt, Brian Benjamin of Two River Mortgage in Red Bank, N.J., thinks brokers should benefit. "It should make brokers more essential than ever before," he said. Still, he's worried, in particular, about the lack of jumbo programs for loan officers that ply their trade in the greater New York/New Jersey area. From his standpoint, when it comes to jumbo lending he sees nothing but menu tightening. "If this keeps up, they will kill this market," he said.

But back to the profit margin picture. Craig Cole, who runs Union Bank of California's residential division, thinks some lenders - in particular the big ones - will see their margins shrink as they give up pricing to maintain loan volumes. "This could be bad for brokers," he said, "because it will put more pressure on brokers to compete with the big retail players."