THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Sunday, January 1, 1995 TAG: 9412310265
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY TOM SHEAN, STAFF WRITER
LENGTH: Long : 181 lines
For First Union Mortgage Corp.'s processing center in Virginia Beach, it was supposed to be a year of dramatic expansion.
The mortgage-banking subsidiary of First Union Corp. had announced plans in late 1993 to add 55 employees at the facility, which processes loan applications from Virginia, Washington and Maryland.
The new jobs, it said, would nearly double the facility's work force.
Falling interest rates had fueled a record demand for home loans, especially for refinancing existing mortgages. The tidal wave of loan applications showed no sign of subsiding. But by mid-1994, a sharp rise in interest rates dramatically slowed refinancing activity throughout the country.
Instead of hiring more underwriters, loan officers and closing specialists, First Union Mortgage slashed employment at the center last year from 60 to 33. Ten or 11 more employees will be let go before the end of March, said George Rosario, a senior vice president in Charlotte who oversees the Virginia Beach operation.
Nationwide, mortgage companies have responded to intense competition by slashing their payrolls. Many have closed offices, renegotiated their leases or sublet unused office space. And some have been shopping for acquirers.
Cyclical swings in residential lending have always been part of the mortgage-banking business. With every upturn in demand for home loans, these companies have opened offices and hired additional employees. When interest rates rose and loan demand subsided, they closed their less productive offices and shed employees.
But this time around, the industry has to contend with the enormous lending capacity left over from the 1992-1993 boom in mortgage refinancing. BOOM BRINGS BUST
Fueled by the lowest interest rates in a generation, the demand for home loans surged to record levels in 1992 and again in 1993. More than $1 trillion of home mortgages were made in 1993 - half coming from the refinancing of older, higher-interest loans.
``This was the largest and longest refinancing period that the industry had ever seen,'' said Debbie Warren, senior vice president in First Union Mortgage's residential-lending division.
With the rapid rise in interest rates during 1994, the torrent of applications to refinance existing loans evaporated. As mortgage bankers scrambled to generate business in a shrinking market, many were bloodied by indiscriminate price-cutting.
``One of the problems is that we came off such an incredible wave of business,'' said Louis L. Tourgee III, division vice president in Virginia Beach of CTX Mortgage Co.
In the face of heated competition among the 60 or so residential-mortgage lenders active in Hampton Roads, Tourgee has reduced the work force at CTX's local offices from 32 to 20 since last January.
Norwest Mortgage Inc., which has three offices in Hampton Roads offices and one in Kill Devil Hills, has also become leaner. During the past year, it cut the number of employees at those four offices to 33, a 20 percent reduction, said Bart D. Auer, Norwest vice president and area manager in Virginia Beach.
In late 1993, First Union Mortgage expected to have enough loan applications to expand the work force at its Virginia Beach processing center. It figured the facility would handle $750 million of residential mortgages during 1994, said Rosario of First Union Mortgage. But through the end of November, the company processed only $223 million at its Virginia Beach center, he said.
With the sudden drought in refinancing activity last year, ``we had a capacity that was three or four times what we needed,'' said Warren of First Union Mortgage's residential-lending division. ``There really was no work for people.'' INDUSTRY SHAKEOUT
Commercial banks and thrifts routinely hold onto some of the mortgages they make and earn interest income from these loans. Mortgage bankers, however, quickly sell all of the loans they make. Their profits come from collecting origination fees and selling the right to service the loans for investors who eventually buy them.
Those mortgage companies that keep the servicing rights can earn a steady stream of income by gathering payments for mortgage investors and keeping a tiny fraction of what they collect.
But faced with severe competition and eroding profits, several mortgage banks put themselves up for sale during 1994. Others simply got out of the business.
Household International Inc., a diversified financial-services company, announced last month that it was shutting down its first-mortgage lending operation.
The decision was prompted by disappointing profits, the prospect of a sustained downturn in first-mortgage lending and the strength of some other activities within Household, including its credit-card operations, said Robert Hartney, a spokesman for the Prospect Heights, Ill.-based company.
For now, Household will keep its $17 billion portfolio of mortgage servicing, but the possibility of selling it is under study, Hartney said.
When interest rates were falling in 1992 and 1993, portfolios of mortgage-servicing rights lost value, especially those with servicing rights that had been purchased from other mortgage lenders. Home loans were being repaid more quickly than expected, reducing the stream of servicing income to mortgage bankers.
But with the upturn in interest rates during 1994, fewer loans were being refinanced, and servicing portfolios became increasingly valuable. The result has been consolidation.
Companies with sizable servicing portfolios can generate hefty amounts of fee income. That has enticed several bank holding companies to buy mortgage banks and their servicing portfolios.
Among them are Chemical Banking Corp., Norwest Corp. and Chase Manhattan Corp. The three giant banking organizations already had large mortgage banks and purchased others during 1994.
In the midst of the industrywide shakeout, some mortgage bankers in Hampton Roads see opportunities to expand their operations.
Beach Fed Mortgage Corp., a subsidiary of Virginia Beach Federal Savings Bank, plans to open an office in Baltimore and a second office in Richmond this year, said John V. Fashing, president and chief executive officer.
Beach Fed, with five offices, closed an office in Chesapeake during 1994 but expects to reopen it in 1996, Fashing said. LEANER TIMES AND STICKER SHOCK
Whatever the expansion opportunities, mortgage lenders still must contend with borrowers' worries about rising interest rates. Rates for a 30-year, fixed-rate mortgage jumped more than 2 percentage points during 1994, although these rates do not necessarily move in tandem with changes in short-term rates.
Still, ``with each announcement that the Federal Reserve is raising short-term interest rates, the public perception about housing affordability goes right out the window,'' said Tourgee of CTX Mortgage.
``We can do certain things to combat the sticker shock of (a 30-year mortgage) going from 7 percent to 9 percent, but we can't overcome the perception that housing is not affordable,'' he said.
Like other lenders in Hampton Roads, mortgage bankers also must deal with uncertainty about the future of major facilities like Oceana Naval Air Station in Virginia Beach and continued reductions in defense spending.
``Budget constraints are not allowing the military to move people in and out of this area like they once did,'' said Auer of Norwest Mortgage.
The news isn't entirely bad. Homebuyers have benefited from the industry's overcapacity and the heightened competition. Some are getting 30-year, fixed-rate loans at rates lower than the 9 1/2 to 9 3/4 percent that they would otherwise be paying, Rosario said.
``We've seen lenders out there charge 9 3/8 percent'' with no points and origination fees less than the 1 percent that is typical in the industry, he said. BETTER SERVICE OR PERISH
Despite the overcapacity in the industry and the pressure on their profitability, local mortgage bankers said their companies will continue to spend money on more advanced technology for processing loan applications.
In recent years, sophisticated software systems have enabled the industry's giants to bolster the efficiency of their mortgage-servicing operations. They are applying more powerful computer and telecommunications technology to the production side of their business.
For any company that expects to be a major player in mortgage banking, ``technology is absolutely essential,'' said Paul A. Mackey, a securities analyst with the brokerage firm Dean Witter Reynolds Inc.
Local mortgage bankers said their loan officers will rely more heavily on laptop computers to speed up the application process and eliminate paperwork.
``Six months ago, our average processing time was probably 48 days,'' said Auer of Norwest Mortgage. Now it's about 25 days and dropping because of more sophisticated technology.
With this sort of campaign for greater efficiency, the industry is going through a major transformation, said Bob O'Toole, a senior vice president of the Mortgage Bankers Association of America, an industry trade group in Washington. ``The origination of mortgages five to 10 years from now will look totally different than it does now.''
But the most pressing issues for mortgage bankers remain the continued overcapacity of lenders and the pressure to cut costs. Throughout 1995, many mortgage companies will continue closing offices, reducing their payrolls and seeking acquirers, O'Toole predicted.
``We haven't hit bottom yet,'' he said, ``so companies are going to continue streamlining their operations.'' ILLUSTRATION: Graphic
STAFF
RESIDENTIAL MORTGAGES MADE
Annual volume of mortgage originations for one- to four-family
residences in the United States since 1985.
SOURCE: Mortgage Bankers Association of America
[For complete graphic, please see microfilm]
by CNB