The twin storms of high inflation and interest-rate volatility are buffeting the mortgage banking industry as never before. One of the imperiled, William S. Steed of Wheaton, says, "The [economic] crisis of 1974-75 was a ripple compared to today's tidal wave."
Like other lenders, mortgage bankers -- in weathering interest-inflation inundation -- have suffered this past year. Mortgages originated in 1980 dropped to $33 billion form $41.4 billion in 1979.
Thomas Harter, chief economist of the Mortgage Bankers Association, predicts the dollar volume in 1981 will be comparable. Allowing for inflation, that means no real growth. By present projections, activity will remain sluggish until May, when higher volume is expected. This year's profits are expected to fall slightly behind those of 1980, when the return on assets was 1 1/2 percent and the return on equity, about 15 percent.
In 1979, the mortgage banking industry experienced a considerable shake-out as troubled firms were acquired by holding companies or service corporations of commerical and savings banks and savings and loan associations; fewer merged with other mortgage bankers. (Figures are not yet available for 1980.) According to Harter, the number of independent mortgage bankers in residential lending is declining as lenders prefer to do business in shorter-term commercial loans.
Mortgage bankers act as intermediaries, borrowing money on the open market to lend to property purchasers. The resulting mortgages are then eventually sold to investors. Many firms are currently losing money on these deals because of the volatility of interest rates. Between the time they commit themselves to lend money at a given rate and the time, often several months later, that they sell the loans, the cost of funds has increased. Because investors demand market rates, the loans must be sold at a discount or loss to the mortgage bankers.
Some mortgage bankers have ceased originating mortgage loans altogether, have furloughed their staffs and are trying to keep afloat by servicing existing mortgages until conditions improve. But the industry remains basically sound, according to Harter: "Most of those that were in trouble have already gone."
Mortgage bankers are not the only lenders in difficulty. This past week, a high administration official remarked that "any honest evaluation of the savings and loan industry would show that their equity has been wiped out." The remarks of this official -- later identified in print as David Stockman, director of the Office of Management and Budget -- were immediately refuted by the U.S. League of Savings Associations which issued a reminder that the aggregate net worth of the business remains above $32 billion, so S&Ls are not about to be wiped out.
The thrift industry is counting on tax incentives for savings to tide it over this difficult period until interest rates fall, and/or revenues from sliding-scale mortgage rates allow them to balance their portfolios. Moreover, the U.S. League is expected to ask Congress this week to approve a plan enabling S&Ls to get new funds from a government agency through the sale of low-interest mortgages.
Compared with savings and loans, mortgage bankers are in better shape. They also are better capitalized. More importantly, they do not have the portfolios of low-interest rates loans that are draining the profits of S&Ls. pIn fact, some S&Ls, by selling off the loans they originate, have in effect become mortgage bankers. Still, as Steed, president of Steed Mortgage Co. of Wheaton, put it, "If all you lose today is overhead, you're fortunate. Otherwise, it means you're losing money on the loans you make."
There are between 60 and 65 mortgage bankers in this region. Some have ceased originating loans. Virginia Mortgage and Investment Co. stopped in late 1979, closing two branch offices. Pennamco Inc. closed seven offices in the Washington area before it was bought out by Manufacturers Hanover Mortgage Corp. in August 1980. Manny Hanny, which bought only the servicing portfolio, chose not to open any originating offices in metropolitan Washington, which is considered a very competitive area. Mid-States Mortgage Corp. also has left.
Mortgage America and First Funding are in the process of merging. Four of their offices have been combined and one closed. Colonial Mortgage Service Co., which is owned by Philadelphia National Bank, is closing three of its eight area offices because its volume of business has been halved. Steed Mortgage was forced to lay off 127 employees and close 13 offices before it was finally acquired recently by the $3 billion Buffalo Savings Bank.
Few mortgage bankers appear to have escaped retrenchment. The collective value of industry firms has been cut in half during the past two years, said one insider. Weaver Bros., one of the area's top five, is doing only 40 percent of the business it was doing a year ago. Carey Winston reports its $25-million-a-month volume of last year has been reduced by half, its personnel cut by 20 percent.
Mortgage bankers see their salvation in a monetary system with stable interest rates. Short of that sunny day, they are advocating that FHA and VA loans -- their bread and butter -- be allowed to float with market rates. Currently government adjustments in rates are well behind the market. Another form of help comes in the form of options on Government National Association certificates (Ginnie Maes), trading in which has just been approved by the Securities and Exchange Commission. Buying and selling options will allow mortgage bankers to hedge against changes in interest rates. o
Finally, mortgage bankers would like institutional lenders to reduce commitment times to as little as 10 days before settlement from current levels of 30 days or more. The purpose of these moves is to pass on the risk of changing interest rates from lenders to individuals.