The year ahead promises to be full of industry changes and noteworthy legislation intended for the financial services markets, but with an unsteady economy and an erratic stock market, members of the banking and finance industry remain cautious.

According to Cynthia Merkle, senior vice president of mortgage banking at Eastern Bank in Lynn and the new chairwoman of the Massachusetts Mortgage Bankers Association, mortgage bankers and brokers have a lot to prepare for in 2003.

While the finance industry prospered from a low-interest-rate environment and steady sales in real estate, Merkle predicts foreclosure rates will level off to a moderate pace in 2003.

“I think foreclosure [rates] are up now, but recent low interest rates have provided individuals the ability to get out of debt,” said Merkle. “There has been a lot of post-closure counseling that has gone on in the state because of nonprofit associations over the years, and that has assisted individuals in retaining their homes.”

Merkle said she believes interest rates will remain stable, but loan volume will decrease at a rate of about 40 to 50 percent because “we may have reached saturation point for borrowers who are opting to finance.”

But, according to Merkle, there also is some good news: Large-scale layoffs are unlikely to accompany even a significant drop in business for the mortgage industry.

“Despite the fact that [loan] volume will decrease, most industry members really relied heavily on advanced technology to handle the [increased] volume vs. hiring additional staff, so from the employment standpoint the impact will be minimal and we are still pretty optimistic,” said Merkle.

Merkle said the MMBA will make significant enhancements to the association’s Web site, including a portal from which members may access information from the state Division of Banks’ offices and investor information, including updated legislative information and financial trends, all of which will be formally introduced and available to members in late January.

Two months into her tenure as chairwoman of the MMBA, Merkle said many legislative initiatives in 2003 will be of importance for the mortgage industry.

From a legislative standpoint, Merkle said the mortgage industry would continue to keep a close eye on the push to expand the Community Reinvestment Act to include the mortgage industry. The issue of community reinvestment is a hot topic for mortgage bankers and “the CRA bill is a whole article in itself,” she said.

But despite concerns over legislative issues and a potentially flattening housing market, Merkle said the biggest initiative in the local mortgage industry would take place in September when the New England Mortgage Banking Conference moves to Providence, R.I.

“Our big initiative is the convention moving to Providence in September. It is shaping up to be incredibly interesting and educational,” said Merkle, who confirmed that financial leaders Fannie Mae and Freddie Mac have both committed to hosting educational seminars at the conference.

‘Challenging Time’

Also forecasting a successful 2003 business climate are the state’s credit unions, said Robert Kimmett, senior vice president of marketing at the Massachusetts Credit Union League, who said there is “an awful lot of power in credit unions for 2003.”

“I think we will see another good year as people are still sorting out their financial alternatives,” said Kimmett. “We think there is an awful lot of power in credit unions – they are small, responsive, member-drive institutions and we define success as having satisfied members … and that will translate into an experience of being very satisfying for a consumer.”

From a business perspective, Kimmett said that “reality is full of pricing issues” including lower fees and rates on loans, checking and savings products. But the business climate, he said, “is still tentative and people are still trying to determine where things are going to go. The worst hasn’t happened, but the recovery is sluggish so people are leery.”

Kimmett said credit unions would continue to prosper in deposits because consumers are still looking for safe haven in their money since stocks and options have yet to recover from a recession.

“For any depository institution, it is a challenging time because of the interest-rate environment and restricted margins, so there isn’t a whole lot of opportunity for income in that area,” said Kimmett.

Kimmett said the association would work toward augmenting small-business lending in 2003, aiming to provide attention to single proprietors in need of meeting their financial goals.

“The total number of credit unions should remain relatively stable, and we are solidly positioned in the marketplace,” said Kimmett. “The banking industry is going to be looking to increase in profitability through marketing campaigns and we are well positioned to deal with that. But, small businesses are the ones that help drive recoveries and we want to do what we can to help be a part of that.”

While the banking industry prepares for another year of competitive marketing campaigns and stellar depository growth, bankers remain cautious about the unpredictable state of the economy.

“Based upon all the current information and the analyst’s perception of where the economy is going, we will see some emergence [from a sluggish economy] in the upcoming year,” said Joseph Gibbons, president and chief executive officer of Salem Five Savings Bank. “There was a lot of [bank] consolidation over the past several years and I don’t think we’ll see it to the same degree. And there won’t be a dramatic change in the [banking] community itself.”

But Gibbons said he believes the industry is “closer to the bottom than we are to the top” in terms of potential performance and profits, and while the market for deposits in 2002 was “very robust and community banks benefited tremendously, the revitalization of the economy depends on how the stock market reacts.”

Another local association, The New England Council, is prepared to address national legislative issues as they pertain to New England’s financial services community and the economy, according to James T. Brett, president of the council.

“The challenges we are facing are truly daunting,” said Brett. “One of the main issues we’ll be looking at is the economic stimulus package slated to be announced at [the president’s] State of the Union [address] … and how it will affect New England and stimulate economic [recovery] in New England.”

Brett said the council will focus on pension reform and said he believes that issue will generate a great deal of interest in Massachusetts and throughout New England.

He added that the council will continue to educate members of the congressional delegation on the impact of the proposed legislative issues slated by various Massachusetts associations, and said the issue of privacy remains one of the biggest topics of concern slated for financial services-related institutions.

In a speech before the Consumer Federation of America, new Senate Banking Chairman Richard Shelby, R-Ala., stated that federal preemption of state privacy law would not happen during the 108th Congress unless “it’s to make the law tougher … to make information sharing an opt-in.”

Shelby noted that the Banking Committee would likely revisit privacy issues in the context of the Fair Credit Reporting Act as a number of the provisions within the FCRA are due to expire at the end of the year, and Brett said The New England Council is ready to confront the issue.

“We don’t anticipate any major changes to the Sarbanes-Oxley Act, but the council will put on a forum dealing with the changes and impacts of Sarbanes-Oxley and other reforms,” said Brett. “From a privacy standpoint, we will continue to educate members of the delegation on the importance of financial services in New England and the importance of having consistent privacy tactics in place and the need to make privacy laws tougher.”

While many hope for significant economic changes in 2003, most industry watchers are predicting only modest improvement in the coming year.

“In general, I think we are all cautiously optimistic,” said Gibbons.