2004 Mortgage Lending Predictions

Ever-growing banks, connectivity, and smart sourcing are three issues taking center stage in 2004 as the mortgage industry experiences some of its most dramatic shifts.

According to executives at Integrated Loan Services (ILS), Rocky Hill, Conn., another Fiserv Resource, mortgage lenders will deal with these key trends in 2004:

• Bank megamergers will continue to shape the competitive landscape. "These megamergers essentially have upped the ante on size and geographic reach," says ILS President Lee Howlett. He points to Bank of America's acquisition of FleetBoston Financial Corp., providing the Charlotte, N.C., institution's first stronghold in the Northeast. "This kind of megamerger sets the standard for the bottom line, sending the message to those in the industry that you have to be huge to compete. We expect next year's mergers to be driven by geography as well."

Howlett points out there still are megabanks with geographic "holes" they believe need to be filled. He also cites shareholder return as another driver of this trend. "Over the past few years, success was fueled by extensive mortgage activity. But we can't expect that kind of volume next year, so banks will need a substitute strategy for growth that excites the capital markets."

• Real Estate Settlement Procedures Act (RESPA) reform will continue as a hot issue. Still, ILS executives don't believe the proposed RESPA statutes will be adopted, sending regulators back to the drawing board. "A variety of different interests simply can't agree," says Anne Politis, executive vice president. "Expect to see federal regulators start from scratch next year. We can't say exactly what will be in the package, but one thing is clear: It will fundamentally change the settlement services industry no matter what else [the Department of Housing and Urban Development] decides."
• RESPA reform has planted the seed for bundled services. "Next year, most of our industry colleagues will position themselves for that change, no matter where they've stood on the issue in the past," says Dave Stokes, executive vice president. "Some will acquire companies to provide end-to-end services in a bundled formation through a single provider. Others will partner with multiple-product providers. Expect acquisitions of vendors to accelerate next year because the window will begin to close and only the strong will survive."
• Mortgage activity will slow. In 2004, the breakneck speed of mortgage lending will slow as interest rates rise.
• Home equity lending will remain strong. Next year will bring a renewed focus on home equity lending because of the interest-rate environment and the need to continually grow business. "Watch for some active marketing in this area, even from institutions that never put much emphasis on it in the past," Howlett predicts. "And don't be surprised if the secondary market [government-sponsored enterprises] take a deeper look at securitization of these assets to continue their market dominance."
• Connectivity will become a key issue in strategic planning for lenders and vendors. "Lenders will strive to transfer data between their systems and those of their vendors, and vendor-to-vendor connectivity will become key," says Tim Gilchrist, senior vice president of Quick Close Operations. "Watch for increased activity in this area. As people look for end-to-end solutions and bundled services, they'll need to connect quickly and provide multiple solutions."

He forecasts that middleware portals, rather than developing connections to multiple vendors, will be "hot." "2004 will be the first time that having the technical talent in-house will be acknowledged as a competitive advantage for larger vendors. Those who can offer immediate connectivity support with all the bundled services will have a significant competitive advantage because they'll be able to price lower, set the standards for others who are behind the curve, and drive clients toward being the most competitively priced option for borrowers."

• Internet lending finally will come into its own with true end-to-end electronic mortgages. "This is because lenders will be focused on opening all origination channels as a means of capturing dwindling loan volumes," Stokes says. He foresees a time when borrowers will be able to check the status of their loans and participate in electronic closings, and vendors will be able to submit electronic documents to some registries. "In 2004, the Internet will become more than just a place to submit an application. It will be the place where hundreds of thousands of borrowers will apply for and eventually sign documents to close loans, all via the Web."
• Lenders will adopt "smart sourcing" to compensate for lower loan volume. "Next year, they'll have to look for better, innovative ways of doing business," Gilchrist says. "They'll need to maximize profit either by cutting staff, broadening product sets, or outsourcing to create variable costs. Smart sourcing is how you do these things. Smart sourcing starts with defining core competencies and pinpointing how they shape your competitive advantages. In 2004, it will mean rethinking business processes and workflows, deciding what falls outside of core competencies, and deciding how to fill the gap with outsource solutions or new products."

"If I had to pick one piece of advice on succeeding in 2004, it would be 'embrace change,' " Howlett says. "Everyone in our industry will have to manage to lower origination volumes, new bundled solutions, emerging electronic mortgages, migration to more home equity lending, and a whole new set of megalenders and corporate vendor configurations."

For information, visit www.ils.com or call 800-842-8423.