Are we on the cusp of another refinancing boom that will outperform the last one? According to industry experts, the answer is yes.
With the recent rate cut of half a percentage point by the Federal Reserve, the number of people applying for refinancing has jumped, with both Countrywide and Fannie Mae announcing substantial increases in the number of applications for refinancings. Applications have risen locally as well.
“I think our volume will increase between this year to last year by probably 35 percent more business,” said Dean Caso, president of HomeVest Mortgage in Newton. “A lot of it depends on what the Fed does going forward. They were very aggressive in cutting the rates before the [scheduled] Jan. 30 meeting,” he said, referring to the Federal Reserve Board of Governors.
“The reason the rates have continued to fall [recently] is because there’s an anticipation that the Fed will cut again on Jan. 30 and 31. So, the market factors in the reduction in interest rates,” said Caso. In the past week, rates have fallen to 6.67 percent for a 30-year fixed-rate average, according to figures posted by Bankrate.com as of Banker & Tradesman’s press deadline. That’s a decrease from the 2000 average rate of 8.05.
Refinancing may be up, but some savvy consumers may be waiting for additional savings, according to Sushil K. Tuli, chairman and chief executive officer of Leader Mortgage in Arlington.
“Because there is so much press about another rate cut by the Federal Reserve Bank, some customers are inquiring about refinancing but not making a decision. They want to wait and see if the Fed cuts the rate again,” he said. But at the same time, Tuli said he has seen a “significant increase” in the number of refinance applications.
Both men said the boom has the potential to be bigger than the cycle ending in 1998. That, according to Caso, is because many consumers came in at the tail end of the cycle and didn’t capture the lowest rate. New homeowners also add to the potential.
“If you take just the people who purchased homes in the last two years, most of those people would benefit by refinancing. A lot of those people during that period of time did adjustable-rate mortgages, be it three years or five years or seven-year adjustables, that could probably now get a fixed rate at the same or lower rate. There are people that were just afraid to do an adjustable and always wanted to stick with the fixed. The fixed has fallen a point and a half from the high so that they would benefit from it,” he said.
Based on the record 1998 year for originations, the national market could see $1 trillion in refinances, a 30 percent hike from 1998 figures, according to Bob Segal, portfolio manager with J. William Mantz Investment Advisors in Gloucester.
“The mortgage market, in terms of loans outstanding, is 43 percent larger now vs. 1997, so that’s another reason why this year could be bigger,” said Segal.
Other factors which could also contribute include the increase in property values resulting in people having more equity in their homes, he said.
‘Boom/Bust Scenarios’
The refinance boom will continue as long as the rates continue to fall, which all depends on what the Federal Reserve does. According to Caso, it could last through April or the entire year if the Fed makes deep cuts.
“If the interest rates don’t drop, I would say at least for the next two to three months we’ll be busy with refi business and then the market will saturate. But if the rates drop, then we could see the refi business going through summer,” said Tuli.
“During the time that they cut, interest rates will keep dropping because that means the economy is just getting weaker, which means rates will go lower. That will cause the boom/bust scenarios for the mortgage business. There’ll be a real rush to refinance and there’ll be less business to do later on,” said Segal.
One of the consequences of the last boom was downsizing, a result of both mass hirings to handle workloads and new brokers who just wanted in on the boom. From 1996 to 1999, the number of mortgage brokers and lenders licensed in Massachusetts steadily increased, from 258 brokers at the end of 1996 to 392 at the end of 1999. At the end of the boom in 1999, employees were laid off, offices closed and the wagons circled for the downturn.
While Segal said some hires will be necessary, if only to answer the phones, local professionals are convinced this boom won’t result in the same mass layoffs and closings.
“We have 40 percent less staff in here then we had two years ago and I firmly believe we can handle the same amount of volume with the same staff. The reasons being that the loan officer up front is running the information through Loan Prospector, and he or she is able to determine what conditions are needed on the loan right up front so they can collect [the information] or make the borrower aware of what is needed,” said Caso.
Another advantage mortgage companies have is better technology. “With the limited staff we have, we use technology more to process and underwrite our loans and handle the volume,” said Tuli.
Both Fannie Mae and Freddie Mac have automated underwriting products they have marketed effectively over the past five years.
“The automated underwriting side of it has made it a lot easier for mortgage brokers, banks, anyone involved in it,” Caso said.
Although there have been other advances in the field, Caso said that was the biggest. “What it’s done is allowed us to reduce the cycle and shorten the timeframe from application to closing,” he noted.
Although automated underwriting has been in existence for half a decade, it wasn’t used to the same degree it is now, said Caso. “It has become an industry norm now. I don’t know of any company that I’ve spoken to over the last six months that hasn’t used Desktop Underwriter [a Fannie Mae product] or Loan Prospector [a Freddie Mac product] in some way, shape or form. It’s a good system, it’s quicker, more efficient and requires less documentation,” he said.
Tuli agrees that automated underwriting will make an incredible difference this time “because a good percent of the loans that will be coming for refinancing have already been put through automated underwriting. So, with Fannie Mae and Freddie Mac’s streamlined underwriting program, it’s easier to refinance a loan now. We’ll be able to put through more volume.”
Also contributing is the increased acceptance of drive-by appraisals and customers who use the Internet to shop for the best rates and apply over the Web.
Generally, as refinancing goes up, purchases go down, but an economic slowdown presents some opportunities.
“A lot of times, a nice byproduct on the purchase market side is that people that are in the market to purchase a home can buy more home. Because the rates have gone down, they qualify for more,” said Caso.
“Purchase money transactions slow down generally because of the economy for the same reason that interest rates come down. If people feel less confident about the economy and less confident about their ability to maintain their job and so forth, they are less likely to buy a home,” said Caso.
