Awaiting Mortgage Fallout
By MATHEW PADILLA
Boom. Bust. Consolidation.
It’s a pattern that’s played out in many industries,automotive, airlines, aerospace, the Internet, telecommunications.
Now industry officials are waiting for the other shoe to fall in the mortgage-lending sector, which is heavily concentrated in Orange County.
The boom: Two years of interest rate cuts created a thriving market for refinancing mortgages and loans to homebuyers.
The bust: The Federal Reserve’s latest rate cut on June 25 could be the central bank’s last. Mortgage rates have steadily climbed since then, while refinancing applications have plummeted.
Consolidation: Stay tuned.
“Historically, when the refinance boom ends you see a lot of consolidation in the brokerage market,” said Joseph Tomkinson, chief executive of Newport Beach’s Impac Mortgage Holdings Inc., which buys mortgages, mortgage-backed securities and originates loans. “You are going to see some changes. As to when that’s going to come, I don’t know.”
OC’s mortgage players include big names such as Washington Mutual Inc., GMAC Mortgage Corp.’s Ditech.com, Impac Mortgage and subprime lenders New Century Financial Corp., Ameriquest Mortgage Co. and H & R; Block Inc.’s Option One Mortgage Corp.
The big lenders are likely to see a tempering in the heady profits they’ve enjoyed during the boom. Last year, Option One made up most of H & R; Block’s profits, while Ditech and the rest of GMAC Mortgage made up most of General Motors Corp.’s black ink in the second quarter.
But the big mortgage lenders themselves aren’t likely to go away.
The smaller, newer mortgage companies are another question.
They may be able to withstand a slowdown. After all, mortgage rates still are at historically low levels and homebuying still is brisk. But the smaller players,which originate loans and place them with lenders,don’t have other operations to fall back on like the big companies do.
Smaller players include: Irvine-based InstaFi.com, which started in 2000; Greenlight Financial Services Inc., also based in Irvine and started in 2001; San Diego-based Planet Mortgage Corp., which launched last year and opened an Anaheim office this year; and Irvine-based subprime lender Encore Credit Corp., which started in 2002.
Executives with InstaFi, Greenlight and Planet weren’t available for comment.
The upstart mortgage companies employ thousands of people in OC who originate and process mortgages. Most have expanded in the past two years, helping prop up the weak commercial real estate market.
Royce Sharf, senior vice president with brokerage Studley in Irvine, said mortgage companies have leased 1.5 million square feet of space here in the past year.
The smaller players stand to feel pressure as demand for refinancing plummets and mortgages from homebuyers slow, said Michael McCarthy, general manager of Costa Mesa-based Ditech.com and a senior vice president with GMAC Mortgage.
“Literally, overnight, it’s like somebody flipped a switch,” he said.
Refinancing applications dropped by up to 50% at Ditech in the past few weeks, McCarthy said.
Ditech doesn’t expect layoffs, according to McCarthy. But he said he plans to cut back on marketing and refocus his workers on other products, such as second mortgages.
GMAC employs about 1,400 people in Costa Mesa at Ditech, GMAC and GMAC’s new CalDirect Home Loans unit.
The industry is set to consolidate, McCarthy said. But neither Ditech nor its parent have plans to acquire other companies in OC now, he said.
“An acquisition would have to be strategic,” McCarthy said.
Buying another mortgage company would lead to overlap, according to McCarthy. A deal could make sense for a retail lender looking to add a call center or an Internet operation, he said.
The fallout could be felt next year, according to David Berson, chief economist with Fannie Mae. He recently revised his projection of $3.7 trillion in 2003 U.S. loan volume down to $3.4 trillion. Next year he expects the number to be cut in half to $1.7 trillion.
Impac Mortgage has a large pipeline of loans waiting to be processed, Chief Executive Tomkinson said. The company’s backlog generally stretches out 45 days and is indicative of how the year should pan out, he said.
Impac recently released second-quarter results with earnings of $29.7 million, up 70% from a year earlier. The company also reaffirmed projections that loan buying and originations could hit $7.5 billion for the year, up from $6 billion in 2002.
Even if the rest of the year fizzles, a good first half and strong July could help mortgage companies hit 2003 projections. New Century, which handles mortgages for borrowers with less than perfect credit, said it did a record $2.2 billion in loans in July.
New Century also said it is on track to hit its target of $22 billion in loans for the year.
Subprime lenders such as New Century have been among the most profitable of the mortgage companies. New Century and others argue that a small rise in interest rates could have little impact on their businesses, since their customers are consolidating credit card debt at a rate of 18% or higher. Whether the 30-year fixed rate is at 5%, 6% or even 9% is no big deal, they say.
Investors don’t seem to agree.
New Century’s stock has fallen steadily since early June and is off 30% from its recent high of 33. The company counted a market value of $850 million last week.
Some industry sources question whether the spike in mortgage rates in the past month was a temporary glitch that could right itself. Rates may fall again before starting a more gradual rise, they say.
Others anticipate inflation and take the rise in municipal, state and federal bonds being issued as proof higher rates are here to stay.
