In sharp contrast to the lengthy refinance boom that has kept mortgage lenders busy for the better part of the past two years, the volume of purchase mortgages – loans to new homebuyers – has been somewhat sluggish.
Lenders in the Bay State, however, say they are not troubled by the low volume of purchase mortgages and, fueled by refinancings, business overall has been outstanding.
But a slight uptick in interest rates and corresponding drop in refinance applications over the past two weeks raises a question: How will lenders be affected if the refinance well dries up and the purchase mortgage market remains tepid?
According to one local lender, while purchase mortgages have been slower of late, there is no indication that it is a trend that will continue in a lending sector that historically has been very steady.
Elizabeth Phelan, vice president and mortgage loan officer for First Essex Bank in Lawrence, said analysts perceive purchase mortgages to be down because the refinancing market exploded. But according to Phelan, the recent dip in purchase mortgage volume has not been great enough to substantially affect business.
“The percentage of total volume that is in [home] purchases, as a transactional nature, either expands or decreases proportionately,” she said. “The reality is that the home mortgage purchases are pretty constant.”
According to Steven Powers, Sovereign Bank of Massachusetts’ mortgage finance department market manager, the bank’s mortgage department normally sees 70 percent of its overall business come from purchase mortgages and 30 percent from refinancing. But with the refinance boom, the scale has tipped in the other direction.
“Once [the mortgage business] goes back to a normalized market – 70 percent purchase and 30 percent refi – it will be a better balance, overall. Meanwhile, no one expected that this would be another furious refinancing environment,” Powers said.
Powers said most banks, including Sovereign, anticipated a reduction in mortgage volume for the 2003 fiscal year so results are likely to be in keeping with expectations. In the end, he said, overall volume is what matters, not whether business comes from purchase mortgages or refinancings.
“If anything, [refis] have been a more profitable position for banks,” said Powers. “The fact is – a mortgage is a mortgage.”
Stormy Weather
The mortgage industry already has witnessed fluctuation in the market for the past two years and, according to a recent study by the Commerce Department, new-home sales are declining further, suggesting that what has been a hot housing market may be cooling.
The Massachusetts Association of Realtors reported Bay State sales of single-family homes in February were down more than 13 percent compared to February of 2002.
In the same report, MAR said the average selling price of a single-family home in Massachusetts last month was about $340,000, down from about $373,000 in January, but still much higher than the $306,000 average in February of 2002.
According to statistics compiled by The Warren Group, parent company of Banker & Tradesman, the number of purchase mortgages in Massachusetts dropped from 90,400 between January and November 2000 to 79,470 during those same months in 2001. Purchase mortgage volume rebounded slightly to 83,279 between January and November 2002.
Economists have attributed the sluggish housing market to the brutal winter in the Northeast, the uncertain economy and war worries, but industry professionals remain unfazed.
“Nationally, February [2003] was one of the strongest months [for home sales] in the last 35 years,” said Tom Gamache, regional vice president for Wells Fargo Home Mortgage in Massachusetts. “We were down in the Northeast, but we think a lot is attributed to the weather. The record snowfalls kept a lot of people inside.”
“This is the time of year where not a lot of purchases are going on because it’s not green outside yet,” said Jon Auger, vice president of residential lending at Middlesex Bank in Natick.
In a survey conducted by The Wall Street Journal’s RealEstateJournal.com earlier this month, statistics show the housing market is softening.
The online journal reported that some homebuyers pushed to sign contracts and lock in at low rates at the end of March. The Mortgage Bankers Association of America projects that the 30-year mortgage fixed rate will climb to 6.5 percent by the end of this year, up from a four-decade low of 5.5 percent in March.
Gamache said that regardless of reports of diminishing home sales, the industry is “still rather strong overall.”
But mortgage professionals say there are some concerns for the first-time homebuyer in the current market.
“The economy has made it more difficult to find a home in Boston. It’s very difficult for first-time homebuyers to find affordable housing and the hard part is that rents are getting so high that people are so anxious to get into a house, but there isn’t a house available in their [price] range,” said Powers.
Phelan said First Essex, a $1.7 billion-asset bank that is an active construction lender, continues to see a reasonably strong market on the homebuilding side, but said affordable housing is a problem for homebuyers.
“I think on the affordable housing side, there is a fairly strong demand but that brings more caution to the buyer – people are thinking more about how they are structuring their [real estate] transactions than they did a year ago,” said Phelan. “In the Greater Boston area, the affordability is really the greater issue. Banks and mortgage companies are continually being challenged to make housing available to a wider audience.”
Auger said business volume for most banks is several times what it would normally be because of refinancing, but his concern also lies with the homebuyers.
“I feel bad for people purchasing. We put purchases at the top of the pile because these people have dates they have to file, but all the other parts of the process make it very difficult for folks to get into their home when they want to be,” said Auger.
According to Powers, there is generally a “healthy pickup” in the purchase mortgage business when the weather grows warmer. However, most of the home sales he expects to see will be for less than $400,000, and so not in the highest profit category for the lender.
“There is good demand out there and good buyers, and they want a bigger house for their money. Currently, we see a lot of activity in the [price range] under $400,000,” said Powers. “That price range is very strong … in the higher echelon, there is less activity in terms of listings and I know of several customers who are looking to trade up from $400,000 to $600,000 [homes] and are having difficulty finding homes in that range.”
As a result, Powers said many first-time homebuyers in Boston are looking at multifamily housing as an option and investment opportunity.
From a business perspective, Powers said Sovereign Bank has introduced a program for low- to moderate-income buyers in an effort to introduce them to the multifamily housing market.
“In multifamily housing, [owners] get the benefit of rent. With that rent, many customers add to their income [to put toward a mortgage payment],” said Powers. “[Sovereign] deducts the rent from the mortgage amount instead of adding it to their income.”
While efforts to boost homeownership rates continue, Gamache said there are “too many factors that could affect home sales over the next year” to be certain how the purchase mortgage market will fare.
According to Auger, however, the industry should prepare now for the refinancing market to dry up.
“These refis will dry up and when they do, [the industry] turns on a dime,” said Auger.
Powers said that low mortgage rates have helped business because of the high demand for refinancing, but historically low rates also present an opportunity for prospective homebuyers.
“From the mortgage standpoint it’s been incredible with refis for this sustained amount of time so banks have more business on that end, but eventually it’s going to go away,” said Powers. “Right now is a terrific opportunity for people to purchase [a home].”
