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   ARTICLE   |   From Scotsman Guide Residential Edition   |   February 2007

4 Key Trends to Watch

As the year progresses, it’s essential to keep an eye on notable industry developments

You would have to be a true visionary if you could look into the mortgage industry’s future. This year, however, it is clear that we have entered a changing environment.

In the past few years, the market saw historically low interest rates, strong housing appreciation and un-precedented mortgage volume. In 2006, however, the housing market cooled significantly. There also has been a decline in investment-property and second-home-ownership. Because of these factors, the industry likely will experience one of its strongest corrections ever in the next few years.

Thus, there are a number of trends worth watching in our industry in the coming year. The most-notable are market-share shifts, increased awareness, steady refinancing and technological innovation.

Market-share shifts

In the past few months, many large, publicly traded and bank-owned lenders began down-sizing their employee bases to address the decrease in mortgage volume. This likely will continue.

Some smaller players are struggling for survival and are ripe for acquisition by larger companies and banks. As a result, this year — and perhaps next year — I believe we’ll see a changing landscape in the industry in which only the strong, smaller players are well-positioned to survive and potentially to seize market share through aggressive, organic growth and merger-and-acquisition activity.

As with the large-scale layoffs, the mortgage industry already has started to see merger-and-acquisition activity reshape the playing field. But there remains a huge opportunity for organic growth among the strong, midsized players.

Large players in the wholesale market already have broad brand awareness and strong market penetration, but this limits what they can do to continue growing their market share. Companies in expansion mode that are building awareness in the broker community by adding employees and branches, however, are poised to capture market share.

In the same vein, as larger players consolidate, centralize and cut costs, midsized mortgage companies are well-positioned to capitalize on the increased availability of talented mortgage professionals. Account executives likely will continue to migrate from downsizing and consolidating firms to more-stable, growth-oriented mortgage companies.

Increased awareness

For brokers who normally would be consumed by large origination volumes, this period of market contraction presents the opportunity to discover or to look more closely at new lenders and their products, pricing, technology and service.

In other words, as origination volume decreases, each loan will take on greater value, motivating brokers to spend more time investigating options to ensure that their customers receive the best-possible product. In this environment, the quality of lenders’ customer service is paramount.

Newer players who are expanding and adding resources have the opportunity to increase market awareness, market penetration and market share through exposure to a broader segment of the broker community.

Statistics show that mortgage brokers originate almost 70 percent of loans, and that’s not likely to change. Although many mortgage brokers will exit the industry as it adjusts, it is difficult for large retail banks to compete with the kind of distribution channel that the broker community can provide.

Steady refinancing

Because of increasing interest rates in the past year, refinancings have become a less-significant component of the mortgage marketplace. With the preponderance of “exotic” mortgage originations in the past few years, however, including various ARM products, we likely will see a greater percentage of refinancing activity than we have in previous cycles.

According to Freddie Mac’s Primary Monthly Market Surveys, ARMs’ share of single-family-loan applications increased from 17 percent in 2002 and 20 percent in 2003 to 33 percent in 2004 and 32 percent in 2005.

With $1 trillion in ARMs poised to reset this year, I believe this is going to fuel a relatively steady flow of refinance activity.

Technological innovation

This year, we likely will continue to see moves toward streamlining the entire mortgage process to make it simple for the originator and the consumer. Whether that presents itself through e-notes and e-mortgages or through guaranteed-mortgage-package-type initiatives, it ultimately will open the black box that the mortgage industry is today and expose to consumers what companies are doing and how.

There are some drawbacks to the technology advances we’ve seen to date, however. The ongoing merger-and-acquisition activity poses integration problems for companies that have distinct technology systems.

In addition, as large companies that are tied to old systems try to upgrade, they can run into problems integrating and interfacing with brokers. To top it all off, most companies have different systems, which can be confusing for brokers to navigate.

Ultimately, technology is making inroads with our industry. In the long run, it will have the dual benefit of making the mortgage process more transparent for consumers and making it more efficient for mortgage companies.

•  •  •

For those positioned properly, there has never been a more exciting time to be in the mortgage industry. I’ve never had as much optimism and enthusiasm for what we will accomplish in the next few years.

This outlook, shared by others, should temper the bleak mood of some in our industry. Cycles are a normal part of the mortgage industry. They create opportunities for those participants who understand the cycles and who are prepared to respond. 


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