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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (21598)	1/17/2005 9:32:38 PM
From: russwinter	Respond to of 116555

Raymond James Commentary on mortgage lending, looks like a few things will have to break: industry employment and higher margins through rate increases. This is one place where I agree higher prices (rates)can't be passed.: Judging from all the commentary we’ve been hearing lately from mortgage lenders, the old gray mare she ain’t what she used to be. Overall volumes reported both in the statistics published in this weekly piece and in monthly reports from a variety of lenders point to pretty healthy conditions in the mortgage markets. However, the volume being produced today is apparently much different than the same dollar of volume produced as recently as first half 2004. We were on the road Tuesday and Wednesday with NetBank’s (NTBK/$10.00/Underperform) CEO, who reiterated that pricing competition continues to hurt the company’s conforming mortgage business profitability. Monday, Flagstar Bancorp (FBC/$21.24/Strong Buy) announced that while volume in 4Q04 was strong, margins were much weaker than in previous periods. It appears that the problem is a combination of two things, from our observations. First, while volume is still healthy, a couple of the big banks are apparently pricing very aggressively to maintain their volumes, thereby affecting pricing throughout the industry. Secondly, we believe that the shift away from long-term, fixed rate mortgages is squeezing the profitability inherent in the loans bring produced. In other words, with ARMs running at anywhere from 50-60% of total industry production these days (hybrids included), the spread available from each loan for the eventual investor is likely tighter and, therefore, not worth as much in the secondary market. For the industry’s sake, let’s hope that pricing pressure follows its typical cyclical trend and we begin seeing firming margins over the next quarter or two. Otherwise, we’re looking at a challenging 2005 for the mortgage loan origination business, particularly if rates rise. Mortgage Employment Data released by the Bureau of Labor Statistics (BLS) recently showed that mortgage industry employment rose for the fourth consecutive month in November. Mortgage industry employment rose to 468,800 (+5.4%year-over-year) at the end of November, up from 464,500 at October-end (revised down). We have been expecting mortgage employment to fall given slower activity; however, employment hit new highs again. Overstaffing may negatively impact mortgage industry profitability.