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Mortgage lending volume headed for decline

June 17, 2004

Internet technology spending to remain strong among large lenders

Inman News

The mortgage industry faces as much as a 50 percent drop in loan originations between 2003 and 2005, while mortgage IT spending will continue to grow, according to financial services research company TowerGroup.

Between 2003 and 2005, the growth in IT spending will slow from 7 percent in 2003 to 1.3 percent in 2004, according to TowerGroup.

Ever-dropping interest rates and the refinancing boom handed the U.S. mortgage industry its most consistent revenue and profit growth to date between 2000 and 2003. Mortgage IT spending, particularly for loan origination technology, also increased steadily during this time, fueled largely by the growing need to process rapidly increasing loan volumes.

"As the cash cow of many banks for the past three years, mortgage is the second-largest IT spending category across all retail bank lines of business and had the largest dollar increase in spend in 2003. Yet IT spending on mortgage systems is slowing and will grow just 1 percent for the industry overall from 2003 to 2004," said Craig Focardi, senior analyst in the Consumer Lending & Bank Cards practice at TowerGroup and author of the research.

"Though increasing at a slower rate, mortgage IT spending will remain strongest during 2004 to 2005 among most 'megalenders' – growing at a healthy 12.6 percent. This is significantly above that 1 percent average in part because despite declining loan volume, these lenders can more easily realize large financial benefits in loan origination and servicing efficiency, along with portfolio analysis for outbound mortgage marketing and cross-selling initiatives," he added.

From 2001 to 2003, mortgage lenders invested in new or upgraded loan origination systems, wholesale Web site technology and automated loan fulfillment technology to reduce capacity constraints as loan volumes rose rapidly. During 2004 to 2005 most lenders will see those supply constraints disappear, as total lending volume declines by 30 percent to 50 percent.

IT investment will continue to be essential for all lenders. However their focus is now shifting toward areas like improving operating margins to maintain profitability, portfolio management, direct marketing and cross-selling. Retaining mortgage customers will remain a huge issue in the post-refi market, since the retention rate when mortgagors buy a home averages 10 percent in contrast to an average of 30 percent when mortgagors refinance.

The recent wave of retail bank mergers will moderately reduce total mortgage industry IT spending but have little effect on average IT spending by institution size, as only two of the recent mergers involved institutions that both have large mortgage operations.

TowerGroup also believes that recent banking industry consolidation will not have a significant impact on the concentration of the mortgage industry's assets. More significant are shifts in the drivers for mortgage industry consolidation. While gaining economies of scale is still important for small and mid-sized banks, some large mortgage banks today are actually experiencing "diseconomies" of scale in the servicing arena.

Focardi noted that the ultimate impact of the coming decline in loan volumes on mortgage IT spending is still unclear. "Many firms are continuing long-term IT projects, while others are delaying and reprioritizing planned projects. For retail banks and their mortgage bank subsidiaries, the three most critical questions are: What categories of IT spending are of highest priority within retail banking in general? Which are of highest priority in mortgage lending divisions specifically? And how should the mix between loan origination systems and loan servicing systems change, as mortgage firms move from a focus on acquisition of new loans to a focus on portfolio management?" he said.

Copyright: Inman News Features

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