Bang! Refinance boom is dead

Inman News Features ^ | Tuesday, July 29, 2003 | Jessica Swesey

[Willie Green]

For education and discussion only. Not for commercial use.

Lenders, brokers, title cos. cope with enormous decline in business

The longest-running home loan refinance boom in the history of the mortgage sector came to a sudden end this month after long-term interest rates spiked nearly 1 percentage point in just a few weeks.

The Mortgage Bankers Association of America forecasts that mortgage production volume will reach a record $3.39 trillion this year, then plunge to $1.9 trillion next year.

"Obviously, going from 20 million loans a year to 13 million loans a year will be a hit on everybody," said James Maher, EVP of the American Land Title Association.

The dramatic and sudden collapse of the mortgage refinance boom is sending shockwaves throughout the home loan and real estate closing sectors of the nation's economy. Loan officers are staring at pink slips. Lenders are rethinking their product mix and pushing the envelope on pricing. Title and escrow companies are capping payrolls, and real estate agents are recapturing power they once held in their relationship with mortgage and settlement services providers.

Layoffs are fast becoming a reality for mortgage brokers who entered the business during the boom years. But lenders who have survived prior down cycles are planning to hang on by broadening their purchase-money and home equity business lines. Lenders have no choice but to redirect their business in light of the anticipated enormous drop in refinancing loan volume, sources said.

Steve Kropper, founder and strategy VP of Domania, which provides click through analysis-based customer retention system for mortgage brokerage companies, said lenders' direct business channels will suffer the most from the drop in refinancing business, which usually accounts for 80 percent of the volume in lending channels that involve little or no assistance from a salesperson.

Competition among lenders will be painful, but purchase-money borrowers could benefit from the heightened interest in their applications and business. Higher long-term interest rates won't shut off the flow of home-buying mortgages, Kropper suggested.

Some mortgage lenders quickly are concentrating more attention on their existing customers.

Netherlands-based ABN AMRO is focusing on purchase programs for current customers and training retail employees and business partners to sharpen purchase origination skills, according to Garth Graham, SVP of the company's e-commerce and customer relationship management functions.

"We have lowered our profit margins on purchase loans to be sure we are very competitive on these transactions," he said at Inman News' Real Estate Connect conference last week in San Francisco.

ABN AMRO created new marketing campaigns that specifically target current customers ready to buy their next home. The lender also will focus on broadening its home equity loans business, according to Graham.

The end of the refinance boom turns up the pressure on lenders to squeeze more cost savings out of the mortgage origination process. More lenders are utilizing automated loan origination systems and online mortgage origination platforms to cut costs.

The collapse of mortgage refinancing also will affect title, escrow and appraisal companies that also benefited from the surge in business.

The title industry's first-quarter 2003 profits more than doubled to $186 million compared with $88 million in the same quarter the previous year, according to ALTA.

Maher said title insurers also will focus their attention back on home purchase and sales transactions.

But he doesn't expect mass layoffs on the order that mortgage brokerages may experience because title companies refrained from adding staff during the refinance boom and instead used part-time help and contractors to curtail costs.

"We've gone through the cycle before. Most of the owner/managers are aware and will be cognizant of keeping the payroll in line," Maher said.

Kropper suggested that loan officers who neglected their relationships with realty brokers and sales associates during the refinance mania once again will be knocking on the doors of realty offices and looking to cultivate those relationships.

"Realtors control all the purchase loan flow," he said.

[Willie Green]

Percentage of mortgages in foreclosure hits record
Layoffs Loom as Mortgage Boom Wanes
U.S. mortgage demand falls in July 18 week-MBA
Mortgages to Hit $3.4 Trillion in 2003

[Gunslingr3]

looks like the end of the housing boom is nigh...

[Steven W.]

you just figured this out? boy you're fast ROFLMAO

however, this part of the cycle warrants some further consideration because a number of folks who've delayed refinancing for some time or who weren't paying attention and didn't realize the bubble was about to burst, now nearly a couple months back, are going to refi quickly and with blazing abandon. However there will be no further refi-after-refi except for those who've been negligent to the point bordering on near stupidity. As for the larger industry, however, the same facts which dominate so much of the world elsewhere, which regularly seems so far beyond your ability or comprehension, is that good companies which have mortgage based exposure, will continue to do well, regardless. Those strictly mortgage backed REITs with lower quality loan exposure, obviously, will suffer. Those major financials which have such a diversified portfolio of income generating businesses, will only see their worth & earnings continue to increase, for as mortgage intake may decline their alternative sources of revenue, albeit business based or other consumer avenues, will start rolling even more dough with an inevitably improving economy. On the other hand, however, the whole set of facts underlying collapse of the bond market bubble and the correspondingly inevitable rise in interest rates portends the obvious potential for vastly improved economics and an obvious sign of inflation - so those holding gold or other commodities without any earnings ability, pricing power or leverage to inflation will be hit tremendously in the months / years to come.

[Steven W.]

why? are you moving to a boat anytime soon?

(I know you're just parroting conventional wisdom and the perpetual mantra of doom & gloomers but, despite all the naysing, as long as human beings require places in which to live, there will always be considerable earnings power in housing).

[CROSSHIGHWAYMAN]

looks like the end of the housing boom is nigh...

I know a couple of builders who have been very busy with lots of future proposals.

They were also doing great a couple of years ago and a couple of percentage points higher.

The housing building business may slow a bit but it will remain hot for the foreseeable future!!

[glorgau]

I just sold my house. Hope it was at the peak. I'll be renting for about a year, then I'll be looking for bargains. Hopefully.

[chris1]

Here in the NY metro area, things are so F%^&ing out of control with the real estate prices. 500k buys you barely anything. Even with low interest rates, I can't see how this runaway train will do anything but derail.

[CJ Wolf]

that's a gamble if I ever saw one. Good luck

[ex-Texan]

The mortgage industry has been taken over by fraud artists. The word is getting out. Many people who thought they were getting a deal ended up paying excess costs and refinance fees through their noses. Some mortgage companies are using exotic games to begin non-judicial foreclose:

E.g. selling the mortgage to a holding company and notifying the home owner intentionally late. Many unwary buyers are on a ramped up fee schedule by contract for late payments. With their first delayed payment they get a notice for excessive fees and costs. If they cannot pay immediately, the costs, fees and interents costs mount up daily. Within 60 days they face foreclosure.

Mortgage fraud is rampant across the USA. The justice department turns blind eyes and deaf ears to the problem and just ignores a brewing national scandal. A few eastern banks have even been 'take over' by the Mafia. They purchase packages of loans which are 'in default' through Wall Street. I know quite about this horrible situation but cannot post what I have learned. 'Nuff said.

The house of cards is beginning to crumble.

[Coop]

Dead? You'll have to tell that to my credit union, that has me on a ten-week (yep, ten weeks!) waiting list to refinance.

[chris1]

Although I don't know if this means anything, many people I know who were stockbrokers in the "boiler room" shops have now moved into the mortgage business.

[TBall]

I wonder if there is some way you could lock in on a loan now for a house you will be buying within the next year? Rates could be real bad in a year.

[chris1]

The real estate situation in many areas ( I am in Westchester County, NY) seems just like the stock situation of the late 90's. People are getting in line to outbid each other for old, overpriced, high taxed, houses that will need a fortune in repairs. Its not the substance, its the frenzy. I actually was looking at a FSBO house yesterday and a woman offered the seller $15k cash to walk away from a verbal committment he made to another prospective purchaser. The house needs a new roof, it is a legal one family but has three "tenants", it is in lower Yonkers and has 8k property taxes, the schools are terrible - Price 500K. SICK!!!!!!!!!!!

[chris1]

The real estate situation in many areas ( I am in Westchester County, NY) seems just like the stock situation of the late 90's. People are getting in line to outbid each other for old, overpriced, high taxed, houses that will need a fortune in repairs. Its not the substance, its the frenzy. I actually was looking at a FSBO house yesterday and a woman offered the seller $15k cash to walk away from a verbal committment he made to another prospective purchaser. The house needs a new roof, it is a legal one family but has three "tenants", it is in lower Yonkers and has 8k property taxes, the schools are terrible - Price 500K. SICK!!!!!!!!!!!

[Question_Assumptions]

Come down into Central NJ and you can find houses in the $300K range. The property taxes are cheaper than North Jersey, too. Don't know much about Westchester County or CT, but Yonkers looked like it might have some bargains if you don't need to use the schools.

[chris1]

You are a day late and a dollar short about Yonkers. Everywhere surrounding Yonkers is bezerk and it has finally caught up with the prices in Yonkers. Little tiny cape cods will run you 399K. The crazy thing is that the taxes in the surrounding areas are almost double. I have a client in Pelham , NY with a 1/8 parcel who pays 13K property taxes. I have another in Scarsdale who pays 55K!

[Question_Assumptions]

I haven't been in Yonkers since 2001. We did some work with the city government and it looked like they were doing some nice things with the place. I guess people noticed. Property taxes are out of control in Bergen County, NJ, too. I hear a lot of "$12,000" per year up there. One of these days, people will get on the voucher bandwagon or find another way to finance public schools.

[Mannaggia l'America]

Dead? You'll have to tell that to my credit union, that has me on a ten-week (yep, ten weeks!) waiting list to refinance.

That's about how long I had to wait with my credit union. They received my application on May 21 and just found out last week that my settlement is on August 5. The one good thing was that they give me the lowest rate they offered between the day they received my application and they day they issue the commitment letter (which was about two weeks ago). Their rates are around 6% now, but I'll get 5.125%.

But the wait is just due to refinancings already in the queue. I would guess that people who were going to refinance are already on the list and if you haven't refinanced by now, you missed the boat and going forward, there will not be many refinances.

[BooBoo1000]

As Warren Buffet says " We are in the rinse cycle now". Nothing is going to happen for a while, and housing is going to go into the tank, as soon as they get the interest rate up a few more points.... The ones that are really going to get an education, are the ones that re-financed their house, and then they find out it is worth less than the mortage on the property. It is what is known as being in a mortage upside dowy..

[Question_Assumptions]

If you really want to see out of control, though, take a look at the SF Bay area. A friend is moving out there and you can't even find any house for less than $300,000 and they are building on 0.06 acre plots. They can fit 8 of those houses inside of my property. Ugh.

[chris1]

The problem up here is that the pols and sucker moms go for every bond issue for new funding for schools that gets put on the ballot. These idiots are voting themselves a tax increase and then complain about it. They are trying to rehab downtown
Yonkers and "take it back" from the thug ghetto mutants that exist there now. It is nice Hudson River waterfront property, but is infested with a low class element that makes most people want to stay out of there.

[Reeses]

On the other hand ...

You talk like an economist! :-)

Can you suggest ways of shorting the home real estate market? Unfortunately I can't short sell my neighbor's house.

[Question_Assumptions]

I walked from Yonkers town hall down to the train station a few times. As far as depressed areas go, I've seen worse, but I don't think I'd want to take that walk at night. It looks salvagable. Having spent some time talking to various levels of city government there, Yonkers has a lot going for it if it can get some more businesses to move in.

[chris1]

Another problem we have here is that everyone is renting out their basements and using that to justify inflating the price to that of a 2 family home. The building dept. rarely gets involved and the result is often too many people trying to fit in too few homes. Don't even get me started about our liberal trash pols who advocate "green space" laws prohibting new building - they, in my opinion, are part of the reason housing is so expensive here and in such short supply.

[Dems_R_Losers]

Well, I am one of those numbskulls who fooled around (also had to fire a bad mortgage broker, which cost me the lowest rate several weeks ago) and am still in the middle of a refi. Gritting my teeth about the rising rates but still will save big $ over my existing mortgage. Am taking out no cash so don't have to worry about an upside down loan. My loan will be 50% LTV and less than 80% of my original purchase price 10 years ago. Will get a home equity line of credit to finance an addition this fall. HELOC money is still cheap, mine is 1% below prime.

My loan officer sent me a good article about the "leash" effect on bond prices. Whenever the price goes above or below the 25-week average, there is a "leash" effect and prices are yanked back into line. Yesterday the rate on the 10-year Treasury bond went above its 25-week average for the first time. This suggests some yanking back soon.

[chris1]

Yonkers - geographically, is perhaps the best located city in the NYC Metro area. 15 minutes to NJ, CT, NYC, 1/2 hour to airports, Jones Beach, etc. The biggest problem in Yonkers has always been the schools, which depite a mostly Italian/Irish American population, are 90% minority and fair terrible by all objective testing and school standards. The pols here are notoriously corrupt, in the fashion of Torricelli. Otherwise, Yonkers does have a good points.

[Mikie]

When we bought our house, we got a 120-day new-construction lock. I'm not sure if they go out any longer than that. We missed the absolute bottom of the market but low enough that I have no regrets.

BTW, some company (E-loan?) just introduced a "portable" loan that you can take with you from house to house when you move. A smart idea when the rates are this low, but what will the call for it be when the rates are 7% or higher?

[Gunslingr3]

Everyone wants to own a place to live yes, but at what price? When I see the record home ownership rate, the ratio of debt to GDP, the level of debt as a percentage of after tax income, and the current interest rates, I don't see the basis on which to expect growth continuing at this pace. If supply is increased, and demand merely levels off, what happens to prices? Obivously real estate is incredibly sensative to local factors, but the macroeconomic factors don't lead me to conclude the boom will continue.

[pabianice]

I wouldn't have forecast it, but the housing market in even Massachusetts is sliding. Homes which had been appreciating at an average 15% a year have now flattened-out to almost no appreciation in the past year. However, the market for new mini-castles proceeds unabated. Big, ugly houses that look like the set for "The Stepford Wives" and are not built to standards; i.e. 4 nails per siding square instead of the required 9; quarter inch plywood floors instead of the minimum half inch; rooves with half the number of required supports; etc. They are being passed by building inspectors on the take and leaving the enw owners with a piece of crap that starts falling apart in three years. Meanwhile, the builder has gone back to the Ukraine or Columbia...

[FITZ]

Rates could be real bad in a year.

Rates will probably fall again because no one is going to leave their low-interest homes to get into one that costs them more. Otherwise what could be next is falling home prices ---- in many cities home construction is the only thing that provides any kind of jobs so they're overbuilding. In other cities you have 3 or 4 families living in one house which will bring down the neighborhood's home values.

[FITZ]

Also loans have been given out too the less than credit-worthy and some who took out loans will lose their jobs -----houses that are foreclosed often go up for auction and at low prices. Some homes in some areas may hold their value.

[RightWhale]

Some realtors are getting a little edgy.

[chris1]

No offense to any real estate brokers herem, but they are, as a group, much worse than lawyers and mortgage brokers in the real estate transaction process. They lie, are often ill informed about essentials of the properties they show, grossly inflate the prices to increase their 6% commission, and worst, often get in the way of the closing itself.

[rintense]

Houses going up everywhere here... and I refinanced in April- saving almost $200 a month.

[chris1]

It has even gotten so bad in the Bronx NY that people are constantly knocking on my grandma's door asking her to sell them her house. The area is a good one in an Italian/American section, but this is a 100 y/o house for all sake!

[Beck_isright]

FEDS ANNOUNCE $230B BOND BUMMER

Enjoy. I guess this means that we can start exporting our mortgage re-fi businesses overseas now too.

[Beck_isright]

The repos are increasing daily. You'll get some great bargains in the next 18 months.

[Spyder]

Guess I'll have to stop complaining about Hawaii prices. Bought our 2100-square feet, brand new, around $327K. I saw an identical model sold the beginning of July for $395 (2 years later). Schools aren't good either but it's a nice neighborhood.

[chris1]

What is crazy here in NY is that we even have a mortgage tax of 1% of the loan. The bank is required to pay another .25% of the loan. Closing costs in NY are abot 5% of the total cost of the house.

[RightWhale]

It's a common complaint. There are excellent realtors, but there are a lot who don't always do a decent full job. The fast talkers are mostly salesmen, and probably most of those aren't the one in the office with a real estate license. There's a lot to know about real estate and it can't be learned in a month.

[Beck_isright]

Which is why the citizens of your state are moving to my state (FL) at a rate of about 300 plus per week. For $200K you can get well over 2500 square feet of home STILL in many parts of Florida. And with no state income tax, etc., it's no wonder we are gaining population at a mind boggling rate.

[chris1]

I am considering moving my debt collection business down to FL as we speak for those reasons.

[Beck_isright]

If you have $500K for a home, you can live like a king. Especially if you like living on a golf course. I have no idea why people tolerate living in high tax, unionized, left wing states like NY and NJ. But many people and businesses have figured it out. Florida will boom until the next demorat is elected governor. Then it will die like California.

[timydnuc]

I've been dealing with this for months. I finally asked a good friend that is a broker, and a lawyer what he would suggest.

I have a 7% loan on a townhouse with all the good characteristics. When the last townhome come up in our neighborhood it went for 183 thousand. We bought ours for 153 (3 years ago). The refinancing 'gurus' wanted to offer us 5.1% refinance with a equity pay out, no deals, no talking, your equity goes down to nothing and you get cash. That's a short term solution. Sure, the decrease in payments would bring down payments. They claimed that I would get a 350 dollar relief in monthly payments. Well they did that by giving me a 5.1 percent loan on a 30 year note. I have a 7% loan on a 15 year note. You do the math! There is very little they could do to argue the mathmatics of the situation. And, they would not take the deal of a 5.1% rate on a 15 year note. Most of these hustlers are just that. They smell money and an easy way to get it.

My well established mortgage bank and I are talking about a 6% fixed loan, at 15 years with a reduction in payment of 200 bucks, and NO reduction in equity. I'm going to take that, because it sounds good enough to be true.

[Jhensy]

Westchester here too; we just bought our first house in Colonial Heights, one of the nice areas of Yonkers, right next to Bronxville/Eastchester. Schools do suck, but we plan on trading up in about 5-10 years, when our kids will be reaching middle school age. 'Til then it's Catholic school.

We searched for over a year-and-a-half, with a high limit of $400,000. It was depressing. Junky, run-down heaps in New Rochelle, not-worth-it condos in Dobbs Ferry, undersized WAY-up-the-line ranches in Cortlandt, Mahopac, Brewster. Forget it.

Finally found a real nice starter, bid immediately, held off the other frantic bidders and got it. Paid $399K; nice house, 3 bedrooms, garage, basement/den, standard Westchester split, nice lawn, deck out back, no repairs necessary, 30-minute commute to Midtown, we move in next month.

A year ago, I would have considered it overpriced. Not anymore. I've come to the conclusion that the inevitable decline (or crash) in the NYC suburbs will come in the higher end -- the people who are asking $750,000-$1M for their typical split levels. Starter homes will always be in demand here, there's so few of them available.

People from outside the NY area who read this probably think we're out of our minds. But the average salaries of just about all the people I know are now in the $100,000 range, some of them much more than that. My brother-in-law, a Honda salesman, makes over $200K in a good year. My Wall St. friends, forget about it. In the late 90's it was ridiculous what people were making around here.

So here, $399,000 starter homes are not crazy at all. It's not that different a cost/income ratio than anywhere else.

[chris1]

I live in Colonial Heights myself. Small world!!!!!!!!!!!! We need to talk.

[jern]

for later

[chris1]

I am just telling it the way it is. "Thug ghetto mutant" embodies a certain type of being that has mutated from normal civilized society. "Frenzy" that one speaks for itself. The way we were begging to pay $75 a share for AOL and these other stocks shows the frenzied mentality that can take hold of many people.