2007 predictions for the mortgage lending industryLee Howlettborrowing, security, secondary market, sub-prime Lenders who want to finish 2007 with a smile on their faces need to spend the next 12 months listening and reacting to the marketplace. Already fickle consumers will be more demanding and less loyal if you don't treat them right. To succeed in 2007, lenders will need to pay attention, look around and get in front of trends. Here are a few trends we can already foresee: The return of functional borrowing We anticipate that borrowing in 2007 will be more functional; by that, I mean applying for home equity loans for education, debt consolidation and home improvement. The tax deductibility factor in home equity lending will keep it an attractive source. It will be unlike the past few years when consumers were heating up the market by refinancing first mortgages with short-term equity lines of credit. Next year, we predict a more traditional marketplace with refis being for traditional mortgage products rather than as home equity liens or loans. The primary reason for this shift is the change in the interest rate environment. Recently, the first mortgage refi rate has gone to six percent; prime is 8.5 percent. Security will be king We expect all lenders to be more concerned with security than ever. These fears have been fueled by continuing stories about compromises of customer data. We forecast that lenders will want higher levels of security and, most likely, encryption for all data. In fact, in anticipation of this demand, we will be encrypting all of the data we exchange with the lenders we serve, whether or not they request it. Continued streamlining of the mortgage process There will be a continued need to get customers hooked in by closing the deal as soon as possible. Lenders will be looking at streamlining and doing things better because the slowdown in the market means increased competition for each customer. We know the drop off in the refi market will continue. We expect that to lead to increased competition for every loan. And lenders will be playing in an environment where that competition will come from some unusual places, like the new banks in Wal-Mart stores. Home prices nationwide to rise slightly in 2007 We expect price appreciation to weaken, but remain positive in 2007. Fiserv Chief Economist David Stiff is forecasting a modest 1.2 percent price appreciation next year for most of the United States. This contrasts with a 7.1 percent appreciation in 2006. He does, however, expect prices to fall in metro areas where speculators and investors have driven up prices over the last few years. He foresees that this home price correction will hit some metro areas, like Boston and Detroit, in late summer. He expects this to be the leading edge of a home price correction that will hit about 90 metro areas later in the year. These are mostly places where speculators and investors drove up prices to unsustainable levels. Most California and Florida markets will experience price declines over the next two to three years. Other areas where he is forecasting declines are Las Vegas, Phoenix, New York City and Washington, D.C. A slow return to home buying Homebuyers who have been sitting on the sidelines will slowly move back into the housing market in 2007. That's because the fundamental housing demand drivers are strong. These include increasing rates of household formation, a moderately strong job market and, although mortgage rates are rising, they are still low by historical standards. Purchases of primary residences should slowly recover as prices stabilize, but investors and speculators have been driven out of most markets. This means that markets where recent demand was driven mostly by speculators (e.g., Las Vegas and Miami) will see lower sales activity for a long time. A strong secondary market for non-conforming loans Most Wall Street firms are reporting record volumes of loan acquisitions in 2006 and are planning for another record year in 2007. To facilitate this goal, we see many Wall Street firms either purchasing mortgage companies (like Merrill Lynch's recent purchase of First Franklin Mortgage) or taking a financial stake in mortgage companies (Goldman Sachs recently acquired an equity stake in Down-Home Financial). Wall Street firms are generally becoming more creative in their ability to maintain high volumes of mortgage acquisitions. This trend will continue for the unforeseeable future. New competition from Wall Street in the sub-prime arena Wall Street will get into the brokers' space by buying up origination channels for sub-prime lending. So instead of buying portfolios from sub-prime lenders, they'll use their own channels. Diversity spending will become a major initiative for more banks Banks will aggressively cultivate loans to more diverse markets in response to the changing demographics of their customer base. Spurred on by growth in both the African-American and Hispanic populations, as well as President Bush's push to increase minority homeownership, minority homeownership reached a record rate of 49 percent in 2002. That growth will continue. Lenders will initiate major marketing campaigns aimed at these groups in 2007. In addition, they will seek to do more business with minority-owned outside vendors who are already familiar with the factors important to minority borrowers. E-signatures moving toward reality Banks will continue to struggle to implement e-signing of loan documents in 2007. Consumers have been slow to accept this technology, so lenders have chosen to introduce electronic documents gradually. They started by sending federal disclosures electronically. The form is nothing more than a precursor to acknowledging a mortgage, but by having consumers accept it, banks are getting the consumer in the habit of using the Web. It's another step toward e-signatures. More RESPA violations in 2007 Affiliated business arrangements are still complicated by regulatory restrictions. The Real Estate Settlement Procedures Acts (RESPAs) impact on affiliated business arrangements will remain a significant consideration in the formation of joint ventures. Despite the need to find additional revenue streams, the hard and soft costs need to be weighed. Vendors who do not maintain true standalone business status will continue risking regulatory sanctions in 2007 because we do not foresee any changes in RESPA in the next 12 months. Locking in the consumer Success in 2007 will come from meeting multiple needs for each customer. This trend has been taking shape for the past few years. Consider Bank of America's recent statement that customers will get free stock trades from their broker/dealer or Wal-Mart's recent announcement that they will offer customers $4 prescriptions. Why would enterprises of that scale do these things when the market isn't even asking for them? Because they canthey are taking a market position that only others of that scale can offer. They are also doing this because adding multiple services cultivates a growing dependence by their customers. They will continue to use their size and power to hook the customer in 2007, making it harder to leave. There are two lessons that lenders will need to take to heart in 2007: 1. Learn ways to provide value in the marketplace from other industries; and 2. Know what the customer wants before he knows it himself. Innovations in customer relationships In 2007, we expect the emphasis to be on the expansion of the relationship with the customer, not in the product arena. Like Wal-Mart, successful lenders will go after more penetration of a customer's needs. They will ask themselves how they can do more for the customers they already have. By giving these existing customers more value, they will be able to strengthen and broaden the relationship. The continued proliferation of home value Web sites will lead to headaches for lenders With the rise in the number of home value Web sites, consumers will become more informed, curious and confused about how much their homes are worth. Value estimates among home value Web sites can vary by 20-40 percent, so there will be more borrowers value shopping before applying for home equity loans and refis. We see this phenomenon having an impact on loan approvals because it will encourage borrowers to challenge lenders' value limits. This will affect lenders who don't have clear collateral valuation policies and alternative valuation, low-cost products in their cascade. Lenders who don't respond quickly and satisfactorily to value challenges will lose precious prospects to competitors. Like it or not, all of us involved in the mortgage lending industry will be playing in a Darwinian arena in 2007. Survival of the fittest will reign. Lenders will need to be better aware and more responsive to the quick changes in the market. If they listen closely, they'll be able to tune into leading-edge opportunities, product innovations, regulatory issues and industry trends that will have a positive impact on their future. Lee Howlett is the president and COO of Fiserv Lending Solutions Fulfillment Services Division. For more information, please visit www.fiservlendingsolutions.com.