We recently hosted a conference call featuring Jerry Baker, president and CEO of First Horizon Home Loan Corp. (the residential mortgage banking subsidiary of First Tennessee National Corp.), and Tim Dale, EVP and residential mortgage banking director of BB&T Corp. Each of these experienced bankers provided a bullish outlook for the revenue and earnings prospects of residential mortgage banking in 2001.

Due to falling interest rates, mortgage refinance activity has begun to surge and new home purchases are holding up well. The Mortgage Bankers Association (MBA) is currently forecasting total 1-4 family mortgage origination volume of $1.48 trillion in 2001, and the forecast of "Freddie Mac" is slightly higher. These forecasts are in line with record origination volume of $1.51 trillion generated in 1998 and up from $1.29 trillion and $1.02 trillion in 1999 and 2000, respectively.

Both Mr. Baker and Mr. Dale also indicated that March is shaping up to be a strong month with respect to origination volume and each anticipates a very strong second quarter. This view is also held by the MBA, which is forecasting that over 30% of 2001 mortgage origination volume will be completed in the second quarter.

Mortgage banking revenue and profits could exceed 1998

Overall, we think 2001 mortgage banking revenue and profits for certain of the regional banks we cover could exceed the amount each bank generated in 1998 or 1999 for three primary reasons.

First, if interest rates continue to fall, refinance volume could be even more significant than expected and the current MBA/Freddie Mac origination forecasts could prove conservative.

Second, refinance volume comprises only 41% of forecasted origination volume this year (by the MBA), down from 50% in 1998; typically home purchase volume is more profitable than refinance volume.

Third, due to low origination activity last year, most regional banks we cover have streamlined origination processes and improved mortgage banking efficiency, which should further enhance this year's profitability.

Furthermore, the MBA is forecasting that 87% of 2001 origination volume will be fixed rate product, in line with the level experienced in 1998 and up from 78% in 1999 and 76% in 2000. Fixed rate mortgages are generally more profitable for the originator than adjustable rate mortgages.

Thus, despite faster amortization of mortgage servicing rights, we expect mortgage banking revenue and profits for most of the banks within our regional banking coverage universe to improve considerably this year.

Nearly all regional banks should benefit (at least modestly) due to branch-based mortgage origination activity. However, the regional banks we cover that should benefit the most include Wells Fargo Corp., First Tennessee National Corp., M&T Bank Corp., BB&T Corp., Union Planters Corp., and Regions Financial Corp. Still, it is important to remind that we expect only First Tennessee to generate 10% of more of its total 2001 corporate profits from mortgage banking. Also, if the economy continues to weaken, new home purchase volume in 2001 could come in below current expectations despite lower interest rates.

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