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Originators continued to struggle in 2007 under very tough market conditions. A poor housing market, combined with turmoil in the credit markets, resulted in double-digit declines in originations in 2007. Although final numbers have not yet been published, the consensus among Mortgage Bankers Association of America and Fannie Mae economists is that 2007 origination volume will be down approximately 15 percent from 2006 levels.

Our early indications are that St. Louis lenders’ total origination activity will be down approximately 12 percent in 2007. Sales of new and existing homes remained very sluggish in 2007. The turmoil in the credit markets, which resulted in tighter lending standards and fewer mortgage products, certainly hurt the housing market this past year. Unfortunately, the projected declines in 2007 total origination activity are on top of significant decreases in 2006. As a result, we anticipate that St. Louis originations for 2007 will be at their lowest level since 2000.

Purchase originations will be leading the decline in 2007. Our early indications are that purchase originations in St. Louis will be down approximately 15 percent in 2007. This projected decrease in 2007 follows an approximate 10 percent decline in 2006 in St. Louis purchase originations.

The one bright spot in the origination landscape may be refinance activity. As we neared the end of 2007, the yield on the benchmark 10-year Treasury note moved toward 4 percent. This change should provide an increase in normal rate-based refinancings of fixed rate mortgages. In addition, a significant number of loans will face resets toward the beginning of 2008. Hopefully, interest rate cuts by the Federal Reserve will restore more liquidity to the financial markets and provide meaningful opportunities for refinance activity.

Although refinance activity appeared promising toward the end of 2007, refinancings for the entire year were sluggish. At this point, RubinBrown’s indications are that refinance originations in St. Louis will decline approximately 10 percent in 2007. Refinance activity for most of 2007 consisted of cash-out refinancings and the conversion of upward-adjusting adjustable rate mortgages into fixed rate mortgages or other loan products.

Several local lenders have done a good job of establishing specialized niches within the marketplace,
and this differentiation will remain crucial for capitalizing on opportunities in 2008. 

Unfortunately, the decline in origination volume over the past several years also has been combined with continued erosion of profit margins (i.e., gain on sale percentage). With the end of 2007, the industry has now completed its fourth full year in the post-refinance landscape. Despite being four years removed from the peak refinance year of 2003, there is no question that overcapacity remains an issue within the industry. The turmoil in the credit markets during 2007 has resulted in more lenders struggling and going out of business. In addition, more lenders are requiring significant capital infusions in order to maintain their operations. Even with many lenders struggling, competition within the industry in 2007 remained intense.

As a result, we anticipate that profit margins will decline several basis points in 2007. This projected decrease is on top of significant decreases for the period of 2004 through 2006. We have noted that this erosion of profit margins has been gradually slowing and will hopefully stabilize in the upcoming year.

In addition to profit margins, the cost side of the equation needs to be constantly monitored. We continue to recommend that lenders be very deliberate in adding overhead costs in the near future. Most lenders have done a relatively good job of adjusting their cost structures to the current origination environment. The key is managing overhead expenditures in the context of projected origination activity. This short-term perspective on cost containment, however, must be balanced against a longer-term investment in certain core employee and other infrastructure costs. Investments in these costs will be crucial to prospering when market conditions become more favorable.

In terms of the outlook for 2008, it is easy to be discouraged by the forecasts of many of the national economists. Projections of double-digit declines in origination activity in 2008 are relatively common. Hopefully, the housing market will begin to recover in 2008 and credit markets will stabilize. In addition, as we discussed earlier, the opportunities for refinance activity appear promising for early 2008.

In order to capitalize on whatever opportunities are present, we continue to emphasize one key factor for success in 2008. It is critical that mortgage lenders differentiate themselves in some manner from their competition. Unfortunately, overcapacity remains an issue within the industry, and there are still too many lenders chasing too few loans. Several local lenders have done a good job of establishing specialized niches within the marketplace, and this differentiation will remain crucial for capitalizing on opportunities in 2008.