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Weak Industry Forecast

WaMu, Wells CEOs speak at Goldman conference

January 2, 2007

By PATRICK CROWLEY


photo of Patrick Crowley
Leaders of two of the country's top mortgage bankers are warning that 2007 will likely be as tough on the industry as 2006 -- though some opportunities do exist.

Kerry Killinger, CEO of Washington Mutual, or WaMu as it is known, and Wells Fargo & Co. CEO Richard M. Kovacevich, each said during a recent Webcast of a Goldman Sachs investment conference that overcapacity, falling loan volumes and new competition are driving their sobering forecasts.

"Mortgage banking is currently a lousy return industry," Killinger said. "It's hard to predict how long its going to take to bring about access capacity in the industry, but it needs to happen before we get back to satisfactory levels.

"In our guidance," Killinger said, "we've assumed that the mortgage industry would be about as tough [in 2007] as [2006]."

Kovacevich was equally dour as he predicted a continuing drop in mortgage loan volumes.

"Loan volumes will continue to decline," he said. "They'll be down 15 percent or so [in 2006] and probably be down another 15 percent or so (in 2007)."

As part of its presentation to investors and analysts WaMu showed a series of slides that represented the company's performance and forecasts as well as an overall view of the industry.

On the mortgage banking front one slide read "Severe overcapacity, low industry margins and profitability". Another stated "Home loans is underperforming in a challenging environment."

Killinger said an "orderly correction in housing prices" that started in late 2005 allowed the company to prepare for higher "loan losses and delinquencies."

"I think we are in good position to weather what we expect to be a continuing challenge in the housing markets," he said.

WaMu went through a painful job cut, slicing its mortgage unit and eliminating more than 9,700 jobs overall. That has put the company in a position to handle the industry slow down, but Killinger said other industry players have not reacted similarly.

Employment rose 8 percent while originations fell 35 percent, Killinger pointed out.

"There is a total disconnect in mortgage banking between realistic levels of production that are going to happen and the level of unemployment," he said. "Guess what? You can't have volume coming down 35 percent and employment growing by 8 percent without getting an industry in severe overcapacity."

Kovacevich does see a silver lining, at least for Wells Fargo, from investment banks and giant Wall Street players getting in the mortgage origination business.

Wells can make money servicing the subprime loans make by investment firms.

"It's unusual to have new players entering the market," Kovacevich said. "But at least in our case that will help some of our issues. This has been for us, actually.

"We are a very, very good at servicing, and there may be an opportunity for us on that side," he said. "In the non-prime area they are doing all the origination ... and we've just basically become the mortgage servicer for them."

But that business may also diminish because several Wall Street firms have entered the market by buying mortgage companies that service as well as originate loans.

A Wells economist, however, said he sees a turnaround this year and is encouraged by what he saw late in 2006.

In a statement, Wells senior economist Scott Anderson said most of the damage in the housing market has already occurred and he sees signs of recovering, such as a 15 percent increase in mortgage purchases since the beginning of November.

Existing home inventories have hit a plateau over the last four months, and the Wells Fargo National Association of Home Builders index has held above its September low for three consecutive months with builders reporting an improved sales outlook, Anderson said.

"The decline in home prices hasn't yet resulted in a decrease in consumer confidence and spending, or a general decline of household wealth and it's unlikely to occur next year," he said.


Patrick Crowley is a feature journalist and blogger for MortgageDaily.com. He is also a reporter, blogger and columnist for The Cincinnati Enquirer.
e-mail Patrick at: [email protected]

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