Mortgage industry faces challenge
As interest rates creep upward, new loans are expected to plummet by 2004.
dmregister.com
By S.P. DINNEN
Register Business Writer
07/27/2003
Heady times in the residential mortgage industry are expected to screech to a halt, creating a formidable challenge to Des Moines' two biggest private employers as their home finance units strive to prosper in a down market.
Wells Fargo & Co.'s home mortgage unit, which is based in West Des Moines and locally employs 2,300 people, is the nation's biggest loan originator. Principal Financial Group Inc.'s residential mortgage unit employs 1,900 people in its Des Moines-based operations. Together they originated nearly $400 billion worth of loans last year, a figure they are sure to top this year.
Yet amid the boom, a new Mortgage Bankers Association report estimates home mortgage business overall will fall 42 percent in 2004.
The home mortgage business over the past two years has been propelled by deliciously low interest rates that have spurred people to buy homes, or existing homeowners to refinance their mortgages.
Refinancings have been especially powerful, and currently comprise almost 70 percent of loan activity.
While future home purchases should remain fairly strong, especially if the economy improves, home refinancings are causing concern about the industry's future.
Refinancings quickly move up and down along with mortgage interest rates, and it's a good bet that today's bargain-basement interest rates won't be around in 2004 and 2005.
"I think everyone is under the impression that we're going to see rates go up," said Joanne Konz, president of Nationwide Advantage Mortgage, a 300-employee unit of Nationwide Insurance that's based in West Des Moines. Indeed, rates on a 30-year fixed mortgage crept up .39 percentage points in just the past week, and the banking group measured a slight decline in loan activity.
With that upward trend in interest rates expected to continue, Paul Bognanno, president and CEO of Principal Residential Mortgage, said his company has several tricks up its sleeve to keep its business healthy.
First, he said that loan servicing should naturally strengthen. That's the part of the business that processes payments and other administrative tasks associated with a home loan, generating fees for the servicing company. As homeowners have rushed to refinance, it has unsettled that business.
"What's good for (loan) production is not always good for servicing," Bognanno said. So as refinancings cool, servicing should stabilize. Principal services $108 billion worth of loans, while Wells Fargo services $580 billion.
Bognanno said Principal also can work to strengthen the way it markets its loans. The company has had success with correspondent lending - buying mortgages already made by other banks, thrifts or credit unions - and could ramp up that end of its business.
Still, Bognanno acknowledged that a severe drop in mortgage activity could affect Principal enough to force the company to trim staff. If that occurs, the company would most likely first turn to about 500 people it currently employs as temporary workers.
While Konz said staff cuts aren't out of the question at Nationwide Advantage, it likewise is looking to broaden its marketing efforts to blunt the impact of any downturn. Banks, employer groups and even agents who sell Nationwide insurance products are being contacted by her company, which specializes in online loan applications.
Wells Fargo's plans are not known. Spokeswoman Debora Blume said of the Mortgage Bankers Association report that "it's all projections. And that's not something we get into."
Wells Fargo held a job fair late in June to hire 1,300 people for its various Des Moines-area business units, including its mortgage unit. Just as with Principal, any downturn in loan origination business at Wells Fargo likely would be accompanied by an upswing in loan servicing.
Scott VanderPloeg, a securities analyst who follows Wells Fargo for Raymond James & Associates, said he expects that, as the nation's biggest mortgage producer, fewer loans means fewer employees.
"I would expect it to slow dramatically next year," VanderPloeg said, giving a possible timeline.
Still, VanderPloeg said he doesn't see any falloff in mortgage activity harming the parent company. Principal is diversified enough that softness in mortgages could have a minimal impact, he added.
Despite the dramatic plunge, Frank Nothaft, chief economist at Freddie Mac, the mortgage lender, said it should be looked at in the context of an "an incredible year." Even if it scales back to $1.46 trillion, the industry will outperform 2000. |
