The people have spoken: refinance demand is officially down. Or rather, it’s returned to a more “normal” level than bankers were seeing this past spring.

More than 90 percent of the bankers responding to the Fed’s most recent loan officer survey reported moderately to substantially lower volumes of refinancing applications, compared with the volumes they saw this past spring, when rates hit an historic low.

In response, the Fed said, many banks shifted focus back to the purchase market, if they weren’t there already, reducing processing time for home-purchase loan applications and increasing marketing of purchase loans to potential borrowers. Very few, however, said they reduced origination and processing fees, minimum required down payments, or FICO scores for approving purchase applications.

“In addition, very few banks reported having become more likely to approve applications for new mortgages eligible for purchase by the government-sponsored enterprises from borrowers with combinations of FICO scores between 620 and 720 and down payments between 10 and 20 percent,” the report noted.

“Everybody was looking to refinance when rates were in the low threes, so when they went up, I think that took a lot of activity off the table,” Ed McDonald, president of Salem Five Bank, said. “But [rates] just started inching back down over the last couple weeks, and I see and hear some people considering whether it’s a good time to refinance.”

McDonald estimated that Salem Five’s purchase-to-refinance mix is probably about 70 to 30 percent, respectively, whereas earlier this year, it was closer to 50/50.

Paul Gershkowitz, first vice president of Greenpark Mortgage, estimated a similar mix at the Berkshire Bank division he heads up.

“Most people that were able to do rate and term refinances at the very low levels were able to accomplish that already,” he said. “Now you’re seeing more of the refinancing you would see in a normal market, which is refinancing for needs or life events,” like home remodeling, education or a divorce.

While bankers are pleased to see increased purchase demand, slowing refinance demand is something of a mixed bag because it can also mean less fee income for banks making those loans.

More Revenue

“Lots of refinancing has generated fees for banks, so if the fee income goes away, they’re going to need to supplant it in some way. It’s possible they have some spread they can use by keeping mortgages on their books,” remarked William C. Wheaton, a professor at MIT Center for Real Estate. “They’re going to have to find some way of making up for that income.”

That was at least part of the picture at Berkshire Bank during this year’s third quarter, when the $5.5 billion bank recorded a $3.5 million drop in noninterest income, which included a $1.7 million decrease in mortgage banking fees. That is due in some measure to lower fee income resulting from a lower volume of refinance applications.

But Gershkowitz isn’t particularly worried about that.

Though some of the lower fee income is the result of slackening refinance demand, the other big piece of it is that Greenpark Mortgage just isn’t holding so many loans for sale, instead opting to hold more loans on its own portfolio.

Loans held on portfolio may produce less fee income in the short term, but they are more valuable to the bank over the long term, he said.

“The annuity of the servicing is there, and it also keeps us closer to our clients. Holding the servicing gives us much more ability to cross market other products offered by the bank,” Gershkowitz said.

And while some expressed concern that the coming qualified mortgage rule could tamp down purchase activity early next year, others aren’t so sure about that.

Of the ability to repay rule, McDonald commented, “That’s not new to us.”

“There are going to be changes. Of that, we are sure. But a lot of the changes still are not finalized yet,” Gershkowitz said. “You are going to have to look at the business differently, come mid-January, distinguishing between a qualified mortgage and a non-qualified mortgage, but I do believe there will be a market for both.”

He added, “Generally what you’re probably going to see is that loans will be offered that are not QMs, but you will have higher interest rates or fees associated with that type of loan because it’s all based on risk.”

“Falling refinance demand will be generally more temporary,” Wheaton said. “Purchase demand is probably rising for good.”

Email: lalix@thewarrengroup.com