The once-red-hot U.S. mortgage market has significantly cooled. So have the fortunes of Fishers-based Irwin Mortgage Corp.
Last year, Irwin Mortgage's profit dropped $57.8 million, or 74 percent. Then, on April 4, the company revealed it expects to take a "small" loss in this year's first quarter. As a result, Irwin Mortgage has reduced its number of branch offices around the country from 169 to 49. The company is also cutting its local headquarters staff by 100, to 488 employees.
Irwin Mortgage, a subsidiary of Columbus-based Irwin Financial Corp., responded to IBJ's requests for information, but declined to allow interviews of its executives. Instead, Irwin referred to its statements in regulatory filings with the Securities and Exchange Commission and its press releases.
"We are obviously very disappointed by these short-term results," said Irwin Financial Chairman and CEO Will Miller in an April 4 statement. "However, I view them as transitory and not wholly unanticipated."
"I believe we are making the right decisions in our mortgage banking business to bring it back to profitability," his statement continued.
Acquired by Irwin Financial in 1981, Irwin Mortgage was once known as Inland Mortgage Corp. It originates, sells and services residential mortgage loans in 25 U.S. states. Before its recent consolidation, Irwin Mortgage operated in 33 states, according to the 2004 annual report it filed with the SEC.
Irwin Financial is quick to note that the rest of its subsidiaries-commercial banking, home equity lending and commercial finance-are doing well. Total company profit in 2004 was $69.9 million-just $2.92 million less than the 2003 all-time high of $72.8 million.
Management attributes Irwin Financial's recent mortgage division setback primarily to the cooling of the overall mortgage market and to Irwin's own troubles hedging against the recent volatility of interest rates.
Just two years ago, Irwin Mortgage's fortunes were soaring. In 2003, it originated $22.7 billion worth of mortgage loans, which resulted in profit of $78.1 million. Both figures were high-water marks for the company.
But what a difference one year can make. In 2004, Irwin Mortgage originated only $13.1 billion in mortgage loans, which resulted in profit of just $20.3 million, a 74-percent drop. A report on 2005's first quarter is due April 29, but Irwin expects a loss.
In recent months, interest rate volatility dogged Irwin Financial's plans. In February and March, Irwin notes, longterm interest rates moved from 4.88 percent to 5.65 percent. The volatility, Miller's statement said, rendered Irwin's hedging strategy less effective than expected.
And at the same time, Irwin Financial is having trouble getting the market to recognize the value it sees in one of its growing assets: mortgage servicing rights. Generally Accepted Accounting Principles, or GAAP, requires mortgage servicing rights to be valued on the books at either their cost or market value, whichever is lower. Irwin Financial believes this means the actual value of its mortgage servicing rights is now $25 million more than GAAP accounting shows.
But in the end, Irwin Financial couldn't escape its problem with overcapacity. That's why, officials said, it moved aggressively over the quarter to shed employees and assets necessary for yesterday's hot mortgage market.
"Mortgage loan origination profitability continues to be challenged by overcapacity in the industry and, more specifically, at Irwin Mortgage," Miller said in his April 4 statement. The company is now focused on its profitable retail lending markets, targeting low- to moderateincome consumers, he said.
The mortgage business is inherently rate-sensitive, said Joseph Stieven, equity analyst for St. Louis-based Stifel Nicolaus & Co. The current volatility makes any hedging strategy both complex and difficult.
"Everybody that we know in the business is having trouble, although not always to this extent," he said. "Irwin, in all honesty, over the last five, 10, 15 years, has done an excellent job. But any one quarter can be taxing. It's sort of like a great baseball player with a great batting average. That doesn't mean he can't come up to the plate once in a while and make outs. It happens."
But Ross Demmerle, equity analyst for Louisville-based J.J.B. Hilliard W.L. Lyons Inc., said Irwin Financial might reasonably have been expected to see a drop in its mortgage business, since the slowdown in the national mortgage market was long anticipated.
"I would have hoped on the origination side they would have foreseen some of that," he said. "It was sort of written on the wall."
Even so, Demmerle also expressed confidence in Irwin Financial's longterm prospects.
"I think they'll be able to recover from this," he said. "It's just going to take some time."