It’s not a boom, at least not officially. But the rush to refinance home mortgages is definitely on.
“This month may make our year,” says Tom Ward, president of Majestic Mortgage Corp.
Normally, January is a slow month for the Mundelein lender because of the harsh Chicago weather. But this has been the firm’s best January ever.
“Business is up 60 percent, and it’s all from refinancing,” Ward reports. By comparison, Majestic didn’t refinance a single loan last January.
At PNC Mortgage, a big national lender, volume is up 40 to 45 percent because of home owners “looking to refinance,” says Tony Meola, executive vice president of production for the Vernon Hills-based firm. “It’s starting to look and feel like the ’98 refi boom.”
Maybe so, but the Mortgage Bankers Association in Washington isn’t quite ready to pronounce the run a full-fledged boom. Not just yet, anyway.
For now, it’s more of a burst than anything else.
“If we stay at this level of activity, we’ll call it a boom,” says Doug Duncan, the MBA’s chief economist. “It has to be sustained.”
The good news is that the current rush actually began several weeks before the Federal Reserve Board, in a surprise move in early January to jack up the slowing economy, cut short-term interest rates by 0.5 percent, or twice the more usual 0.25 percent step.
The Fed’s cut in the federal funds rate (the rate financial institutions charge one another for overnight loans) sent long-term mortgage rates to less than 7 percent for the first time since April 1999, according to Freddie Mac, a secondary mortgage market company which purchases loans from local lenders.
But because of the weakening economy, rates on home loans had been trending down since last May, when they reached 8.64 percent. And people were already taking advantage of the decline when the Fed shocked the markets with the rate reduction on Jan. 3.
For example, Countrywide Home Loans, the nation’s largest independent mortgage company, refinanced more than $1.9 billion worth of loans in December alone. That was a 91percent increase over December ’99 and helped push the Calabasas, Calif.-based company’s mortgage fundings up by almost 50 percent.
By contrast, last summer, only 7 percent of Countrywide’s loans were the result of refinancing, the lowest rate in the firm’s 32-year history.
Still, Duncan, the MBA economist, says boom status won’t be conferred unless mortgage rates remain around 7 percent or dip lower than that for six months or so.
“Right now,” he points out, “we’re only a couple of months into it.”
Keith Gumbinger of HSH Associates, a Butler, N.J., publisher of mortgage data, isn’t ready to use the “b” word, either.
“I can’t go quite that far,” says Gumbinger, whose firm surveys 2,500 lenders on a weekly basis. “It’s more like an echo. The refi boom of ’97-’99 was far deeper and wider.
“This time around, there are somewhat fewer people available because rates haven’t been all that high.”
Nevertheless, the MBA is predicting that mortgage rates should average just about 7 percent for the next year, says Duncan, “so it should be a big year for refinancing.”
So big, in fact, that the trade group last week saw fit to revise its forecast for mortgage originations for 2001 upward to a whopping $1.412 trillion. Only a month ago, the MBA was predicting loan volumes of $1.155 trillion for the new year.
Furthermore, whereas original estimates were that 26 percent of the smaller number would be the result of home owners trading in one mortgage for another, the latest projection is that refinancing will account for 39 percent of all home lending in ’01.
Other market watchers are suggesting that total originations could go even higher this year than the MBA thinks. But even if the association is on target, this will go down as the second best year ever for the home loan business.
The only year they did any better was in 1998, when lenders wrote $1.507 trillion worth of mortgages.
Back then, though, half of all loans were the result of refinancing. So even if the current burst does in fact become a boom, it won’t be as big as ’98.
But even a somewhat smaller boom will be plenty big enough to put ear-to-ear smiles on the faces of a lot of lenders and a lot of homeowners, too. The only question now is when to pull the trigger?
Do you get greedy and wait to see if rates continue to subside? After all, the Fed is widely expected to take rates down another quarter percent when it meets this week. And some analysts believe another 25-basis-point cut is in the offing after that. The Fed’s decision is expected Wednesday.
Or do you take advantage what you can get now? And why not? If mortgage rates do drift lower, you can always refinance again and again and again, if you like.
The smart money says act now, if not sooner. For one thing, most observers believe current mortgage rates already take into account the Fed’s anticipated short-term rate cut.
“There’s always a little push, but it won’t be anything more dramatic than an eighth of a point at best,” says Meola of PNC Mortgage.
Furthermore, Fed cuts sometimes result in higher, not lower, mortgage rates. In fact, according to an HSH analysis, within four weeks of the four of the last six rate cuts, mortgage rates were higher then before the Fed acted. Not a lot higher, but higher nonetheless.
“Fed moves can bring unintended consequences,” warns Gumbinger. “Mortgage rates have been declining lately due mostly to the weakening economy even as the Fed sat on the sidelines. Now, the Fed is back in the game, and those looking for significantly lower mortgage rates ahead may be disappointed.”
Gumbinger’s advice: “If you can find a mortgage package which makes sense, take it.”
Ward of Majestic Mortgage agrees.
“The last thing you want to be is paralyzed,” says the 13-year mortgage industry veteran, noting that many of the people who are calling him now are the same ones who waited too long the last time rates were tumbling.
“They don’t want to miss out this time around.”
“Trying to pick and choose the best rate is like trying to pick the low point in the stock market; you can’t do it,” adds Meola. “Besides, the 7 percent range is still an excellent rate.”
If you took out a mortgage between $252,700 and $275,000 within the last 12 months, you are an excellent candidate for refinancing. Ditto for anyone with an adjustable rate mortgage that’s nearing its anniversary date or borrowers who put less than 20 percent down and have seen the values of their properties appreciate significantly.
Last year, a loan above $252,700 was considered a “jumbo” loan. As such, it was priced at a rate anywhere from 0.25 percent to 0.75 percent higher than “conventional” mortgages below the limit.
For 2001, though, the ceiling has been raised to $275,000, which means you can not only recoup the difference between last year’s rates but also take advantage of lower rates this year.
Call it a mortgage market double whammy, only in your favor. And if rates should continue to fall, you can refinance again. A rare triple play, if you will.
On the other hand, if your adjustable rate mortgage, or ARM, is about to adjust, you could be looking at a new rate that’s significantly higher than what you’ve been paying, even as market rates fall.
ARM adjustments are based on indexes which not only are 45 days or so old but tend to lag the market by even longer periods.
Consequently, although market rates hover around 7 percent, you could be paying 9.
If you made less than a 20 percent down payment, you are paying for private mortgage insurance that protects the lender in case you default on the loan. However, if, through a combination of rising property values and monthly mortgage payments, you now have enough equity to put up 20 percent or more on a new loan, you could rid yourself of that cost by refinancing.
KEEP IN MIND
Any rush to refinance could prove troublesome, especially for short-handed mortgage companies that have laid off staff in anticipation of a slow down in purchase money lending.
While its doubtful that even a full-fledged boom will overload the delivery system as it did in 1987 and 1993, it pays to be prepared.
Start by obtaining a copy of your credit report to be certain it contains no errors, and correct mistakes if you should find them. Next, call a lender to find out what type of documentation might be required.
Typically, you’ll have to produce current pay stubs and savings and checking account statements. If you are self-employed, you’ll also be asked to produce copies of your last two federal income tax returns as well as an up-to-date profit-and-loss statement and perhaps even a financial statement. Also bring along a couple of blank checks for a new appraisal and credit report.
