Business Week reports on the shrinking mortgage business. "Sometime during the last quarter of 2005, the housing boom peaked. The proof is in the paperwork. Applications for purchase mortgages in early November fell below their 2004 level for the first time in six months, after a 5% drop from September to October, according to the Mortgage Bankers Assn. (MBA). By late December, applications had plunged to June, 2002 levels. The MBA expects mortgage originations to fall by 18.6% in 2006."
"Even the industry's boosters are getting nervous. 'There's no doubt that we're transitioning to a more challenging environment,' says Richard H. Wohl, CEO at IndyMac Mortgage Bank. Lenders' earnings have already begun to fall. 'Profitability in the industry is down, and over time that will take its toll,' says Doug Duncan, chief economist at the MBA."
"During the past few years, the industry built up enough capacity to pump out $3 trillion worth of loans a year. Now retrenchment is in the air. The first real whiffs came in November. The nation's largest mortgage bank, Countrywide Financial Corp. closed two loan-processing centers and eliminated 300 jobs. National City Corp. trimmed 70 workers at its mortgage business and hinted at more to come. Ameriquest Capital Corp. cut 1,500 people."
"The trouble is, the spread between short-term and long-term rates is narrowing. In fact, on Dec. 27, the yield of the 10-year Treasury note briefly dipped below that of the two-year Treasury bill; a year ago, about two percentage points separated the two. The smaller the spread between the two rates, the harder it is for lenders to make a profit."
"It gets worse. As mortgage demand has slowed, price competition among lenders has heated up. 'There are some competitors who are pricing irrationally,' says Stephen J. Rotella, chief operating officer at Seattle's Washington Mutual Inc."
"The result of these forces: a shrinking pie of less-profitable loans. In October, National City said third-quarter home-loan profits tumbled 91% from last year, to $13 million. In November, tax preparer H&R Block, blamed a $72 million loss in its fiscal second quarter (since revised to an $86.3 million loss) on a 44% annual drop in pretax income at its mortgage unit."
"At especially high risk: lenders that have sold lots of mortgages to so-called subprime borrowers with spotty credit records or unstable incomes. Some of these borrowers have escaped default in recent years only by refinancing at higher home values and lower interest rates. 'If real estate stops going up, the opportunity to refinance because of a higher value is going to go away,' says Michael Moskowitz. 'That's going to hurt companies that were doing bad business.'"
"Some lenders also face the consequences of the exotic-mortgage binge that has intoxicated borrowers for the past few years. Problems with option mortgages are already arising. In the third quarter of 2005, the amount of such mortgages available for sale to institutional investors from New York's MortgageIT Holdings Inc. swelled to about 30% of the company's total inventory."
"Those mortgages carry a low introductory rate of 1% in their first month, which is usually how long MortgageIT owns them before selling them. That 1% rate brings in less money than it costs the company to finance the loans with short-term borrowing. Yields on loans held for sale fell during the third quarter, costing MortgageIT about $18.3 million. If short-term rates keep climbing, yields could drop further."