DENISE LEONARD
Staffing levels same
Despite persistent talk about a softening real estate market, the Massachusetts lending industry has experienced strong demand for mortgages related to condominium purchases, steady refinance business and only a slight decrease in the number of loans issued for single-family home purchases through the third quarter of 2005.
Although the number of home loans has dipped slightly, lenders note that home prices are still on the rise and the typical loan amount is up. First-time homebuyers and empty nesters, meanwhile, continue to fuel the condo boom.
“We still have [home price] appreciation occurring,” said James F. Flynn, president of Marathon Mortgage in Hopkinton.
Condo prices also have risen and many empty nesters are leaving their homes for condos.
“That group is much more inclined to [gravitate toward] the condo market,” Flynn said.
According to statistics compiled by The Warren Group, parent company of Banker & Tradesman, the number of mortgages issued to single-family home buyers between January and September this year decreased from 6.5 percent to 42,192 compared with 45,140 during the same period in 2004. However, the average loan amount for single-family home purchases increased 6 percent to $314,898 and the total dollar volume of single-family home loans in the Bay State remained about the same at approximately $13.3 billion. Robert Rocklein, vice president of sales at First Call Mortgage in Andover, said that in addition to being driven by rising home prices, the average loan amount likely went up because of increasingly widespread availability of 100 percent financing options.
“There are more transactions where people are putting less money down,” Rocklein said. “People have less cash to work with.”
Rocklein saw increased revenue at his company because loan amounts were higher. The loans also were more profitable because of an increase in so-called Alt A and subprime loans issued to borrowers with imperfect credit records. Such loans have increased risk but also carry interest rates that are typically higher than “conforming” mortgages.
Average loan amounts are expected to creep up, according to others. Flynn said that $400,000 loans are becoming more common and beginning to fall into the conventional, rather than jumbo, loan category.
Denise Leonard, president of the Massachusetts Mortgage Association and chief executive officer of Constitution Financial Group in Wakefield, said the company’s average loan amount increased 5 percent since last year. However, Constitution Financial is down 20 percent in loan production compared to the same period last year.
Despite the slowdown in loan volume, Leonard has not reduced staffing.
“We’ve always managed ourselves,” she said.
Many of the other lenders expressed similar sentiments and said that, despite a slight slowdown in home-purchase loan production, staffing has not been decreased. Flynn said the industry overall uses less staff, in general, because automated underwriting has become popular among lenders. Automated underwriting technology has helped smooth out staff requirements in an industry that once saw large cyclical swings between boom and slow periods, lenders say.
Meanwhile, others mortgage firms are actually increasing staff. Eric B. Nelson, president of United Funding Corp. in Milton, said over the last three years his staff has grown. Although profitability has stayed about the same from 2004 to 2005, Nelson said if volume slows, he typically spends more on marketing, and generally sees a good return on investment.
Although the single-family purchase loan volume is cooling somewhat, condominium lending is heating up. The number of mortgages related to Bay State condo purchases increased by more than 17 percent in the first three quarters of 2005 compared to the same period last year, rising to 21,888 from 18,587. The average loan amount for condos increased from $227,861 to $249,601, according to The Warren Group.
Refi Surprises
Nelson attributes the strong condo sales and overall loan dollar volume (up 29 percent to $5.5 billion in 2005 compared with $4.2 billion last year) to an increase in condo conversions in Massachusetts. Condos have become popular for first-time buyers as an entry point into homeownership in the Bay State’s high-priced market, as well becoming a popular destination for empty nesters moving out of larger homes.
More first-time homebuyers are entering the market because there are more flexible loan products available.
“A lot of [newer] mortgage products are fueling homebuying,” Nelson said.
Nelson said that while condo prices remain below single-family home prices, they are being driven up by increased demand and condo buyers also are seeking mortgages with higher loan-to-value ratios as they stretch to become homeowners.
With interest rates ticking up, many lenders expected refinance business to slow dramatically. According to The Warren Group’s statistics, the number of single-family home loan refinances decreased 15 percent during the first nine months of 2005 compared with the same time last year, while condo refinances increased almost 4 percent. Total refinanced loan volume, including multifamily and commercial properties, went down approximately 12 percent to 321,865 in the first three quarters this year compared to 366,853 loans issued during the same period in 2004. Total dollar volume for all refinances in the Bay State hit $97.4 billion for the first three quarters this year compared with $88.9 billion in the same nine months of 2004.
Nelson said there have been pockets of refinance activity, with many borrowers who had adjustable-rate loans seeking to secure fixed-rate mortgages before rates rise any further. Others are simply consolidating debt.
The average loan amount for a single-family home loan refinance went up more than 14 percent and condo loan amounts increased almost 22 percent.
Flynn said much of the refinance activity has been fueled by borrowers getting lines of credit or securing fixed-rate second mortgages to pay off debt. In 2004, the average single-family home refinance loan was $157,000. The average increased to $180,000 in 2005.
Because home prices have escalated, Nelson said mortgages have similarly followed an upward trend. People are pulling equity from their home making for larger refinance loan amounts.
Leonard noted that refinances have been popular for borrowers who had a first and second mortgage – so-called blended mortgages, where the first loan is a conventional mortgage for 80 percent of the home value and the second loan substitutes for a typical 20 percent down payment, are a common way borrowers avoid paying for private mortgage insurance – and wanted to combine the loans at a decent rate.
“Refis took place to take care of blended mortgages,” she said.
The total number of mortgages – including commercial loans, purchase mortgages and refinances – in Massachusetts from January through September 2004 was 452,000 compared to about 406,000 in 2005, a decrease of 10 percent. Kevin Cuff, executive director of the Massachusetts Mortgage Bankers Association, said there was talk of a major slowdown in loan activity, but the numbers show that while originations were slower, volume was still brisk. In addition, while fewer loans were issued overall, the total dollar amount of loans in the first three quarters of 2005 increased compared with the same time in 2004. The total dollar volume for all mortgages in the first nine months of 2004 was just over $117 billion compared to $131 billion in 2005.
The top lenders in Massachusetts based on number of loans issued during the first nine months of 2005 were not surprising to industry professionals. Countrywide Home Loans, Citizens Mortgage Group and Fleet Mortgage (now part of Bank of America) occupied the top three spots. “It’s just because of who they are,” Flynn said.
Rocklein agreed. “It’s the brand name,” he said.
Other companies were in top spots because of the refinance boom in recent years but now rank lower, Rocklein said. Norwood-based Poli Mortgage Group ranked 26th in 2003 and 47th in 2005.
“Because they did a lot of refinances, they [were] up at the top,” Rocklein said.
But it’s the bigger banks and lenders that continue to have a strong hold on the local market. Rocklein said larger financial institutions have steady business with purchase loans. He expects that next year, the bigger banks will have an even larger percentage of the lending market share because purchase business, rather than refinances, will constitute a larger portion of all lending activity.
Many other companies, such as California-based Fremont Investment & Loan and Argent Mortgage Co. make it in the top 50 lenders list this year because loans originated by local brokers are often sold to them but they are considered the lender of record, Rocklein said.
Leonard said more banks, including local institutions, are making it to the top 50.
“Banks have gotten involved with the secondary market and Â… have tried to recover market share,” Leonard said.
Banks have also realized that servicing loans is profitable, while others have tapped into more lending opportunities to fulfill Community Reinvestment Act requirements, Leonard said.
Banks have become more competitive with adjustable-rate mortgage products, Nelson said.
“Local banks have a unique niche in the marketplace,” Nelson said, adding some banks are showing interest in teaming up with mortgage companies to increase their originations.
Looking ahead to the remainder of 2005 and into 2006, Rocklein said the number of single-family home purchase loans will drop but other categories of purchase loans may hold steady.
“Properties are on the market for so long” today compared with past years, said Rocklein, which tends to slow the lending cycle, as well.
However, Rocklein expects condo-related lending business to be steady, if not downright brisk.
“Condo sales will continue to be good,” he said.
Leonard said she expects 2005 to end with lower total loan volume than last year. She points to her own company and said it is unlikely she can recover from the 20 percent decrease in mortgage originations CFG is currently experiencing. However, she said the statistics from January to September, which show the industry weathered an uptick in interest rates over the summer, are a “good example of nine months” and most mortgage industry professionals do not view the market as dangerously slow.
Even with interest rates going up – Bankrate.com pegged the average 30-year fixed-rate mortgage at 6.37 last week, its highest point in 18 months – and less refinance business available, Leonard said she is unsure that many firms that thrived on refinance business will leave or be squeezed out of the industry in the near term. She’s also not expecting an influx of mortgage company mergers.
“If it is not a real profitable time Â… I’m not sure people have the money to buy or merge,” said Leonard.
