While many factors play into mortgage refinance activity, the single largest consideration for borrowers likely remains interest rates. The number of refinance loans in Massachusetts peaked in 2003 just as rates hit historically low levels.
The number of residential mortgage loans secured by Massachusetts borrowers dropped dramatically last year compared to 2005 – falling by 16.8 percent for purchase mortgages and 14.8 percent for refinance loans.
The drop in purchase loans for one-, two- and three-family homes and condominiums is directly tied to a slumping real estate market, industry watchers say. The number of home sales for those same types of properties fell by a similar margin between 2005 and 2006, declining 16.6 percent. Both sets of statistics were compiled by The Warren Group, Banker & Tradesman’s parent company, which tracks homes sales and mortgage activity throughout New England.
Refinance dollar volume of residential loans – which surpassed purchase loan volume in 2001 and has accounted for at least two-thirds of loan originations in the Bay State ever since – took an even steeper tumble in 2006, falling 17.8 percent to $51.7 billion from $62.8 billion in 2005.
The numbers are grim, but dig a little deeper and the news isn’t all bad, according to five local mortgage industry experts.
“The housing market is softening. The interest rates have been changing. People are refi-ed out,” said Nelson Braga, a vice president and chief of the mortgage lending unit at Taunton-based Bristol County Savings Bank.
Braga said that the slumping housing market not only has affected home purchase mortgages, it also has had an effect on refinance activity.
“They’ve [homeowners] had a great ride on the appreciation of home values, and now that has dropped off,” he said.
On top of that, in the past couple of years, in order to afford a home, some consumers took out mortgages for 95 percent to 100 percent of the cost, he explained. With values falling, they have no more equity to pull out the home.
While the recent drop in home values has made people to think twice about taking equity out of their homes when refinancing or taking out a home equity loan or line of credit, Braga, whose office closed $55 million in total loans in 2006, predicted 2007 will be more of a buyers’ market, which is good for both consumers and lenders. Stabilizing home prices and interest rates may prompt those prospective buyers who have been holding off to buy a home this year, he said.
Massachusetts Mortgage Bankers Association Executive Director Kevin Cuff agreed that “the cooling of the real estate market” has been a major driver behind decreasing refinance originations.
“In the week right after the holidays Â… I had a steady level of inquiries from people wanting to buy a house or trade up,” noted Bob Rocklein, the owner of Family Trust Mortgage of Burlington, who’s closed $15 million in loans since he opened in August.
That’s encouraging for him, he said, because industry “heavy hitters” he knows saw drops in business of up to 50 percent in 2006.
Saber Salam, mortgage banking division senior vice president at Eastern Bank, suggested that mortgage lenders and brokers that experienced larger-than-average drops in business were relying more heavily on refinance rather than home purchase loans.
“There is less refinance business being chased by more people,” he said, while 2006 remained a relatively strong year for purchase loans.
“The purchase market was $22.2 billion in [banner year] 2003, and $22.4 billion in 2006,” he said. “Given the difference between a booming and a declining market, this was one of the more interesting things to me.”
“Historically speaking, the [mortgage loan] volume in 2006 is relatively high,” said Cuff. More “alternative,” lower-priced adjustable-rate mortgage products on the market have helped bolster mortgage volume despite the slumping real estate market, he said.
Eastern Bank has made a concerted effort to pursue purchase-loan business, as opposed to refinances, Salam said.
“The refi market is huge,” Salam said, but “we know we will get our refinances, so we focus on the purchase mortgages.”
The difference showed in the bank’s 2006 numbers. Refinance and purchase loans each represented about half the total $500 million in loans Eastern closed last year, not including home equity loans and lines of credit. That compares to a 30 percent purchase, 70 percent refinance split on dollar volume for Massachusetts loans statewide in 2006.
Salam said one group of borrowers increased in 2006. Investment property sales and higher-priced home sales slowed down, he said, but the number of first-time buyers went up.
“It’s [the increasing number of first-time buyers] because the leveling of prices makes it more affordable,” he surmised.
‘Creative’ Products
People who refinance have different reasons, usually doing so to consolidate debt, lower monthly loan payments or make a major purchase such as a car, knowing that interest rates on home loans – unlike consumer loans – are tax-deductible, Salam said.
George Downey, founder and owner of Braintree-based Harbor Mortgage, who has been in the mortgage business since 1978, said he has another theory on the of refinance mortgage originations.
While the total number and dollar volume of residential refinance loans in Massachusetts has been dropping off since 2003, the 329,162 refinance loans originated in 2006 is still double the 165,809 refinance mortgages issued in 2000. The refinance dollar volume of $51.7 billion in 2006 is almost four times the $16.2 billion in refinance loans issued in the Bay State in 2000, likely a reflection on average home prices, which rose from $238,649 in 2000 to a high of $383,021 in 2005 and dropped slightly to $378,019 last year.
Downey said he thinks the sheer number of refinance originations, which peaked at 699,999 in 2003, is the end result of new mortgage broker and lender businesses jumping into a white-hot market in the early part of the decade.
The slow decline of interest rates at the start of the decade encouraged people to refinance to get lower monthly payments, he said. “That made for good business, and attracted more [lenders and brokers] to the business,” he said. It also created a veritable “refinance feeding frenzy.”
In fact, since 1998, the number of mortgage-business licensees has doubled from about 680 to the current 1,600, according to Division of Banks Deputy Commissioner David Cotney.
The inevitable drop in refinance originations as interest rates ticked upward, combined with all the new licensees, led to the proliferation of interest-only and pay-option adjustable-rate mortgages, Downey suggested.
“The industry became very creative in creating these option ARMs and subprime loans to keep the refinance market going,” he said. “It was very clever, in my opinion. They were serving their own needs and not the consumer’s.”
MMBA’s Cuff said that may be partly true.
“Half of me says that statement sounds accurate, but the other half says the barriers to the market are just lower to get in – and that’s a function of the modernization of the market,” he said.
Cuff recalled that as recently as 10 years ago, most loans required a 20 percent down payment and the number of loan programs available was far more limited than now.
Today, he said 100 percent mortgages and other options are open to would-be homeowners who don’t have such a large chunk of cash for a down payment but can afford monthly payments, he said. The fact that they’ve been added to the mortgage market is not necessarily a bad thing, Cuff said.
“People can now qualify to buy homes,” he said, where they couldn’t before – and it’s working for some.
