Your Economy (No Politics)

[Bullwinkle]

Consolidation and lay-offs hit mortgage industry
By Julie Haviv
Fri Feb 24, 3:19 PM ET


NEW YORK (Reuters) - A major transition is underway in the U.S. mortgage lending industry, with consolidations and lay-offs at the forefront as companies try to deal with waning demand for home loans.

This shift is expected to pick up steam in 2006 if the housing market, as widely expected, cools off from its record-breaking five-year run.

"There are some very important signals emerging in that we have seen some pretty good companies go on the block for sale or have been sold recently, which is a clear sign that consolidation is seriously underway," said Douglas Duncan, chief economist at the Mortgage Bankers Association, an industry trade group.

Duncan said developments at two mid-sized "good performing" companies may hint to a wider trend.

Waterfield Mortgage Co. recently announced that it will sell its mortgage banking business and Irwin Financial Corp. (NYSE:IFC - news) said last month it hired JPMorgan (NYSE:JPM - news) to look at selling its conventional first mortgage unit, Irwin Mortgage.

"They just couldn't get the revenue per loan that the big guys were getting," he said.

Even the larger firms are poised for a downturn.

Countrywide Financial Corp. (NYSE:CFC - news), the largest U.S. mortgage lender, recently announced it plans lay-offs for sometime this year, partly in response to lower profits on sales of mortgages.

On its fourth-quarter earnings conference call in late January, the company's chief executive, Angelo Mozilo, said intense competition should force some smaller lenders out of the market.

Employment in the real estate and mortgage industry peaked at 504,000 in October of last year but fell to 501,000 in December, according the Bureau of Labor Statistics.

That is a noteworthy shift, given that the sector has been gaining jobs over the past five years. Employment stood at 283,000 in March of 2001.

Mortgage rates are expected to continue ratcheting upward from their historic lows, and that will limit lending and refinancing activity, putting more pressure on firms to find new efficiencies, said Duncan.

A week ago, the average 30-year fixed loan reached 6.22 percent. But Duncan expects it to climb to 6.40 percent by the end of 2006, significantly higher than its 2005 low of 5.47 percent.

VOLUME IS EBBING

The U.S. housing market surged for five years, shattering sales and construction records and sending home prices up more than 55 percent on average nationwide.

But now the market has taken on a "survival-of-the-fittest" atmosphere, said Celia Chen, director of housing economics at Moody's Economy.com, a consulting firm.

"Mortgage lending is an opportunistic business and when business declines, the instinct is to consolidate to become more efficient, and that is what we are seeing," said Chen.

The MBA's seasonally adjusted refinancing index, which hit a record level near 10,000 in May of 2003, stood at 1,571.4 for the week ended February 17.

While refinancing has been trending lower over the past few years, the drop in volume for home purchase loans has gained substantial momentum in only the past year.

The MBA's seasonally adjusted purchase mortgage index-- considered a timely gauge on U.S. home sales -- stood at 408.7 last week, its lowest level since the week ended January 7, 2005, when the index hit 393.1.

According to Duncan, lenders have been holding "slowdown" meetings with their employees, a move he said historically coincides with a turn in employment.

LENDERS LAST HURRAH?

Mortgage lenders, however, are not ready to throw in the towel just yet and are actively seeking new ways to increase business volume, whether through new loan products or reaching out to untapped markets.

"We have worked hard over the past three years in developing a wide array of products -- all credit types, all documentation types, all amortization types and all combinations of first and second mortgages," said Bob Walters, chief economist at Quicken Loans, an online mortgage lender.

By diversifying its product line, Quicken Loans is able to serve the entire spectrum of clients, said Walters.

"The firms that are focused on one type or another will struggle as the market narrows," he said.

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