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Home equity and second mortgages that close within hours of application, automated appraisals and risk-based lending are some of the trends that will shape the mortgage business in 1999. These were three of the predictions released by the staff at Integrated Loans Services (ILS). This is the third year the Connecticut-based provider of residential and commercial loan support services has made predictions for the coming year. Here's what they expect for the next 12 months:

More Home Equity Loans: As the refinance boom of 1998 subsides, we should see an increase in home equity loans for traditional uses: home additions, car loans and tuition. "Last year, people took advantage of the favorable mortgage rates just because they were there," points out ILS President Lee Howlett. "Now that they have new mortgages, we a return to the 'old fashioned' uses of home equity loans in 1999. Statistically there is room for growth: 60 percent of homeowner have a first mortgage, but only 13 percent have a home equity or second mortgage."

Home Equity and Second Mortgage Closings Within Hours of Application: Next year, the market will demand quicker closings on this expanding number of home equity loans. Expect to see an increased use of automated appraisal products and streamlined title insurance products used to provide home equity lenders with information. These products will ultimately allow home equity lenders to close loans in 24 hours.

Automated Appraisals and Other Products to Come Into Their Own: There will greater acceptance of automated products in 1999. As a result, they will be used on a broader scale for first and second mortgages and pre-qualifications.

"We know this because we've seen it at our company," says Dave Stokes, ILS Executive Vice President. "Last year we experienced more than a 250 percent increase in the use of our automated valuation product, and we see nothing that tells us that growth will stop. That's because lenders are more accepting of such products as an alternative to the delays caused by field inspections. Also, we expect to see greater lender confidence in the accuracy and a desired increase in geographic next year." In addition, he foresees an increased use of Internet-based automated appraisal products as the century comes to a close.

Bundled Services: Motivated by consumer demand, Congress and the industry itself, the call for fixed dollar charges for closings will escalate in 1999. "Lenders will have to disclose (and stick to) a guaranteed charge that is payable in addition to interest and points at closing," says Howlett. "To do that, we foresee an increased interest by institutions in bundled services from single vendors as lenders struggle to stay competitive on these demands."

Continued Trend Toward Outsourcing Backroom Mortgage Services: Institutions will continue their emphasis on outsourcing all mortgage support services, not just bundled services. Experienced brokers will increasingly turn to outsourcing as their businesses grow and they want to spend more of their time selling and taking apps. New brokers, who will continue to go out on their own in record numbers, will need their own "loan processors," so they will look for that support through vendors. And banks will want to continue reducing overhead and increasing the variety of services they offer, forcing them to look to outsourcing.

More Lenders to Form Strategic Partnerships to Handle Turn-downs: In 1999, more institutions will focus on capturing customer relationships. "These institutions won't want to allow their customers, even those with B & C credit, to go across the street for mortgages after they've turned them down," points out Michael Kaprove, ILS Regional Vice President. "Instead, they will form alliances with non-conforming lenders to write those mortgages. To the customer, the relationship will not even be noticeable. There will be a seamless transfer of the loan from the A-credit department to the non-conforming lender. The loan will be written, the bank will earn a fee when it closes, and more importantly, there will be continuity between bank and customer. For non-conforming lenders, who used to thrive on turn-downs, this trend may mean they will have to look to solicit joint ventures with such traditional lenders."

Sub-prime Lending To Change: The strong players will survive the current shake-up in sub-prime lending, but their business mix will change. With the demise of the high risk segment of non-conforming lending, these lenders will go back to serving the traditional borrowers they used to. Expect to see more straight B and C lending, without the high risk business like 125s.

"There will always be a need for this and those non-conforming lenders that affiliate with funding sources will survive," says Howlett. "They will find a new pipeline for financing and we expect it to be national banks and insurance companies."

Risk-based Lending To Emerge: The hottest trend in residential mortgages in 1999 will be risk-based lending. "This is more of an individualized approach to analyzing consumers' credit history, using their credit histories, mortgage repayment track records, employment stability, increasing collateral values and FICO scores," says Stokes. "Such lending allows an institution to offer variable rates based upon the strength of the borrower. It requires more sophisticated modeling and more underwriting, but we believe it will come into its own in 1999."

Emergence of Microsoft Home Advisor on the Internet: Next year will be the one in which one product, Microsoft Home Advisor, will change the way real estate is sold. This is a consumer-oriented total solution for real estate purchasing, financing and even just looking for a home. Consumers can use it to learn terminology and the how-tos of buying a home. It helps them search for neighborhood information, find financing and even apply on-line for a mortgage. That financing may be from a bank three time zones away, but consumers will trade convenience for a local banking relationship. "Products like this should worry the traditional lenders, because they essentially allow another company (in this case Microsoft) to 'own' the point of sale of a mortgage," says Kaprove. This product was introduced in July 1998. The mortgage professionals at ILS expect to see the emergence of similar products next year. "Several real estate brokerage firms have them in the works and we expect them to turn mortgage banking into a commodity as opposed to a service in 1999," adds Kaprove.

Interest Rates to Stabilize: Interest rates won't go any lower in the first half of 1999. "Everything hinges on what Alan Greenspan does to help stabilize the world economy and keep inflation is under control, but we look for the rates to stay pretty much where they are for the rest of the century," says Howlett.

He summarizes next year this way: "As the century winds down, there is little anyone can forecast with certainty. This industry changes in a heartbeat. But there's one thing I can predict with certainty: it won't be boring next year. It never is."