Posted on 07/25/2003 1:57:13 PM PDT by Willie Green
For education and discussion only. Not for commercial use.
NEW YORK (Reuters) - With the boom in mortgage refinancings expected to lose steam as interest rates rise, the home loan industry, which expanded at a staggering pace over the last three years, is now bracing for layoffs.
Interest rates remain near historic lows and refinancing activity should reach a new record this year. But with 30-year mortgage loan rates now up nearly a percentage point from recent lows, the tide is turning.
Loan applications, particularly refinancings, have ebbed in recent weeks. While total lending in the mortgage industry is expected to hit an all-time record of $3.4 trillion this year, it could fall to $1.5 trillion in 2004.
The hectic and profitable pace of business in mortgage banking has, in recent years, attracted many newcomers who may be out of a job in the next two years as lending dries up, cautions James B. Nutter, a Kansas City, Missouri-based mortgage banker.
In May, the mortgage banking business employed about 409,900 people -- up sharply from January, when the industry employed 387,100, and from January 2001 levels of 272,300, the Mortgage Bankers Association of America said, citing Labor Department data.
"It (layoffs) won't start happening for a while. The degree and timing depends on how far and how soon rates move," said Douglas Duncan, chief economist at the MBA.
John Westermeier, who has recruited for the industry for 13 years, knows what can happen when rates suddenly head north, as they did in 1994 after the last major refinancing rush.
"It's a pretty steep downhill slide. It can go pretty fast," said Westermeier, a managing director at mortgage career firm Contemporary Services Inc. "Folks who were asking for an astronomical amount of money are willing to take just about anything they can," he said.
At the peak of the 1993 to 1994 refinancing boom, 246,000 people were employed by mortgage banks. By March of 1995, that number dropped to 186,000.
With the experience of 1994 clearly in mind, Westermeier, like others in the recruitment field, is shifting his focus from jobs that generate and process new loans to the more routine positions of servicing loans already on the books.
Lending firms like Nutter's have specifically built up servicing arms to weather downturns in the business of underwriting home loans. "We try to have servicing so we can get through times which are not robust. When you have a servicing arm, that means you are looking at the long term," he said.
Servicing, an important source of profit in mortgage lending, involves the collection of monthly principal and interest payments from borrowers.
"You generally see that those on the operations side are the first to feel cutbacks because they are on the forefront of the refinancing market," said Graham Harwood, chief executive of recruiter Harwood & Harwood, Inc.
Joanne James, who runs financial career site Bestheadhunters.com, said one of the mortgage recruitment firms she works with is anticipating a downturn and looking to other industries, such as firms that provide security.
Leif Thomsen, owner of Walpole, Massachusetts-based brokerage Mortgage Master Inc., said the company is keeping busy closing mortgages it sold in recent months. But he said he sees an upside to a slowdown in the mortgage market.
"It would actually be welcome to see some more normality in this industry right now," Thomsen said. "It weeds out the people that shouldn't be there in the first place."
Regardless if I locked in or not...if my $340,000 home value falls below my $130,000 mortgage; as an indicator; we are all scr*wed.
Okay, my mind's blanking. Unless it's an ARM, why would your contract's rates change at all when the overall market's rates go back up? Will the actual value of the house go down?
For example, the monthly payment on a 30-year mortgage for $200,000 at 6% is about $1,200. If the rate goes up to 8%, then someone who could afford the monthly payments on a $200,000 mortgage at 6% can only afford about a $163,000 mortgage. The 2-point rise in interest rates will effectively knock about $37,000 off the value of the home.
Don't believe it. The price/value of a home is determined by what someone is willing to pay, not the interest rate!
The only thing an uptick of 2 points in the interest rate will do is decrease the number of potential buyers that can afford the house payment.
NickRails is right. A rise in interest rates doesn't mean that nobody will be able to pay a premium price for your home, but that fewer people will. And if you have fewer buyers for your home at the higher price, you'll usually have a decline in the price. The numbers I used were not supposed to be exact, but were used to illustrate how this generally occurs.
A decrease in buyers=less demand. Less demand means lower prices to keep supply/demand curve in equilibrium. (Less buyers for the same amount of goods)
Conversely, more demand and stagnant supply equals higher prices. (More buyers chasing fewer goods
You proved me right. Price/value is determined by supply and demand. Interest is neither supply or demand.
Demand can be affected by lack of jobs, size of family, commuting distance etc.
When was the last time you saw Cadillac prices drop to those of Oldsmobile because fewer people could afford them?
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