TowerGroup Anticipates 30% to 50% Drop in Loan Originations

Mortgage IT spending, particularly for loan origination technology, also increased steadily during this time -- fueled largely by the growing need to process rapidly increasing loan volumes. However over the next two years, the mortgage industry will experience a large and steady decline in lending volume -- facing as much as a 50% drop in loan originations between 2003 and 2005. New research from TowerGroup finds that while mortgage IT spending will continue to grow between 2003 and 2005, this growth will slow from 7% in 2003 to 1.3% in 2004. Highlights of the research include: -- From 2001 to 2003, mortgage lenders invested in new or upgraded loan origination systems, wholesale Web site technology and automated loan fulfillment technology to reduce capacity constraints as loan volumes rose rapidly. During 2004 to 2005 most lenders will see those supply constraints disappear, as total lending volume declines by 30% to 50%. -- IT investment will continue to be essential for all lenders. However their focus is now shifting toward areas like improving operating margins to maintain profitability, portfolio management, direct marketing and cross-selling. Retaining mortgage customers will remain a huge issue in the post-refi market, since the retention rate when mortgagors buy a home averages 10% in contrast to an average of 30% when mortgagors refinance. -- The recent wave of retail bank mergers will moderately reduce total mortgage industry IT spending - but have little effect on average IT spending by institution size, as only two of the recent mergers involved institutions that both have large mortgage operations. -- TowerGroup also believes that recent banking industry consolidation will not have a significant impact on the concentration of the mortgage industrys assets. More significant are shifts in the drivers for mortgage industry consolidation. While gaining economies of scale is still important for small and mid-sized banks, some large mortgage banks today are actually experiencing diseconomies of scale in the servicing arena.