During one of the longest-running refinance booms many in the mortgage industry have ever witnessed, records are being smashed as quickly as confiscated DVDs in China.
Nationwide, mortgage originations totaled a record-breaking $2.03 trillion in 2001 compared to $1.51 trillion in 1998, the previous refinancing high-water mark. Additionally, refinancings accounted for nearly 60 percent of mortgage dollar volume nationwide last year compared with 50 percent in 1998. The figures are part of the recent results from the Mortgage Bankers Association of America’s Peer Group Roundtables.
Local lenders echoed the roundtable’s findings, saying this year looks to be a good one for the mortgage business, as well.
At Boston-based Eastern Bank, total mortgage volume shot up from $184 million in 2000 to $460 million in 2001, said Cynthia C. Merkle, senior vice president of mortgage and small business banking. Of that, 69 percent of the overall closed loan volume was in refinances, she said. Clearly the decline in interest rates played a major role in the boom, she said. And consumers haven’t reached a saturation point yet, although the boom has been on for nearly a year and a half.
“In fact, interest rates went down a bit [two weeks ago] and our volume is just as strong as it was last year,” said Merkle.
“It [2001] was our best year since we’ve been in business,” said Dean Caso, president of Newton-based Homevest Mortgage. In 2001 Homevest’s volume totaled $685 million, up from $325 million the previous year. Additionally, Homevest closed $135 million more in 2001 than in the previous 1998 boom cycle. Caso attributed the increase to an effort to use more of the available technology, broadening into more markets and higher production yields from its existing employees. Homevest has written its own software for processing loans. Unlike many smaller companies in the industry that can’t afford that expense and must buy software off the shelf, Caso said his company was able to tailor the software to how he wanted a loan to flow.
Last year refinances at Homevest accounted for about 65 percent of total originations, while this year refinances and purchase mortgages are breaking even at a 50/50 split. The main reason the first six months of the year have gone so well is the recent drop in rates, he said. “We originated almost $60 million in June and the majority of it was refi business,” said Caso. “I wouldn’t have expected we would do that had the rates not gone down.”
For Leader Mortgage in Arlington, 2001 also proved to be a strong year for business.
“Last year was a record year for Leader Mortgage and for the industry as a whole,” said Leader Mortgage President James Madigan. In 2001 Leader originated $450 million – exceeding the goal he set for the company in an October Banker & Tradesman article. In 1998, Leader generated $360 million.
While Madigan said the reason for the latest boom was simply that rates dipped for the first time since 1998, he added that in the fall of 2001 rates dipped below even 1998 levels.
“So basically it opened up the possibility for almost any homeowner to lower their rate,” he said, adding that if long-term interest rates dip even slightly from their current levels, mortgage refinance volume will likely shoot up again.
“It seems very likely rates are going to stay low for the remainder of the year, whereas six months ago everybody felt that the [Federal Reserve Bank’s Board of Governors] was going to start raising rates,” said Madigan. Contributing to the extended low rate period are the events of Sept. 11 and the continuing bad news emanating from Wall Street.
Caso, who said the current boom is the longest refinance surge he’s seen in his 17-year career, speculated that many people have stopped investing in the stock market. “The consumer has looked at it and said, ‘You know what? I’m better off refinancing my house or better yet, taking that $50,000 I was going to put into the market and maybe put a new kitchen in the house,'” he said. Consumers are looking for tangible results from investments and that has propped up the [mortgage] industry in the last six to eight months.
More With Less
During the current boom, lender productivity has increased while new hirings to handle the increased volume plunged, according to the roundtable’s findings. Locally, lenders have found a variety of ways to decrease personnel costs. At Eastern Bank, instead of hiring more personnel and then divesting the department of them later, as they did in the 1998 boom, Merkle said the bank approached the problem differently. In addition to using the more readily available technology to increase productivity, the bank hired its own people.
“We trained a number of people from the bank in other areas and brought them in very early in the year,” said Merkle. The employees would come in at the end of their regular workday to work a swing shift for the lending side. “We were able to pick up a solid group of employees and it also gave them the opportunity to earn some extra money.”
In the long run, hiring the people who already knew the bank, its computer systems and the level of customer service expected of them helped the bank. Even when volume drops off, Merkle said she expects to employ the six people for additional, but reduced, hours to ensure they’re up to date on technology and procedures for the next refinance boom.
At Homevest, Caso said he reevaluated how people were performing and culled the non-performers from the staff, paring down to 30 sales people from 45 in 1998. Currently, the three underwriters, three processors and two set-up staffers handle the workflow with little overtime required.
“I had a lot of non-producing originators that were just here on the books but really weren’t doing much. When you eliminate low-producing originators it actually makes your operation more efficient because it doesn’t clog up the system [with] the processors are trying to talk to numerous people instead of talking to the few people who can do business,” Caso said.
Locally profit margins shrank, but not substantially and not unexpectedly, according to those mortgage lenders who spoke with Banker & Tradesman.
Both Leader and Eastern experienced a shrinking profit margin but less than double-digit decreases. Leader’s Madigan said the slip in profit margins is not unexpected when entering a refi boom where there is more competition for the customer. Also, refinance customers aren’t under the gun of a purchase-and-sale agreement closing date. They can shop rates at a more leisurely pace. “They can call everyone in the state if they want and get the best rates because they’ve got time on their side. They don’t have a contract with a deadline,” said Madigan.
For Eastern, which services loans, shrinkage of profit margins accompanied the refinance boom as well, largely because of the shortened length the mortgage is likely to stay on the books. If the mortgage is prone to being repaid quickly, loans lose value for investors because there’s not as much money to be made on them before they are paid in full through a refinance. This was true for servicers throughout the country, according to the roundtable findings.
But Caso has used the growth in his company and his experience to enter another facet of the industry. Homevest profit margins increased 30 percent “But that’s really a secondary effort,” he said. In addition to cutting staff and closing two offices, which cut down on overhead, Caso is taking advantage of secondary market opportunities by selling “bulks.”
“Basically, I can commit to deliver to an investor, whether it be Fannie Mae or Freddie Mac or a private investor, a certain amount of business within a certain amount of time and I can get a better buy price because of it,” he said. But if he doesn’t deliver, the companies charge him what is in essence a fee. “If you’re comfortable with the volumes there and if you can deliver on a specific product, it’s worth it,” he said.
While no one seems able to predict with certainty how the Fed will treat interest rates in the long run, the general consensus is that it’s unlikely it will begin raising interest rates until there is a solid indication the worst of the economic news is behind, and many mortgage lenders speculate that means low rates through the remainder of 2002, and another strong year for refinance business.