Academic journal article ABA Banking Journal

Will Refinancing Wave Remodel Lending?

Academic journal article ABA Banking Journal

Will Refinancing Wave Remodel Lending?

Article excerpt

Steve Cocheo, executive editor

The long-term significance of the recent boom in home mortgage refinancings could range far beyond the obvious.

Near-term, refinancing connotes homeowners' ability to save on monthly payments or to restructure their finances, as well as lenders' ability to generate additional fee income during an otherwise down housing market. But that's only the immediate picture.

Lenders and other market observers say the wave that started in late 1991 carries implications for lender profitability; secondary market servicers' efficiency and viability; consumers' product preference; and investors' taste for mortgage-backed securities.

A different breed. The last major boom in residential refinancing straddled 1986 and 1987, but the current trend isn't just a rerun.

Joe K. Pickett, president and CEO of BancBoston Mortgage Corp., Jacksonville, Fla., traces some of the differences. (His firm is a subsidiary of Bank of Boston.)

First, says Pickett, the 19861987 boom followed a period of several years when rates on fixed-rate mortgages hovered in a high range between 12% and 15%. When they fell below 10%, this prompted the boom. By contrast, mortgage rates in the current environment have been preceded by a gradual fall, assisted along by Federal Reserve efforts to cut general interest rates to spur the economy out of recession.

But comparatively low interest rates aren't the end of the story, according to Pickett. When the 1986-1987 boom came, homes had generally been appreciating in market value. Thus, there was usually no question that a home's new appraised value would support a refinancing loan that would at least cover remaining principal.

That isn't the case today. In many parts of the country, notes Pickett, home prices have been falling. As a result, he explains, a home with an original mortgage made at, say, a 70% loan-to-value ratio may be appraised at a lower value. This revaluation could mean that the borrower's outstanding principal now represents a very high 90% ratio.

As a result, says Pickett, some borrowers-particularly those with younger mortgages or in markets where prices have taken a beating--may have to "buy" their way to lower rates by putting other monies into the old loan to reduce principal.

Both sides smarter. A second difference between the last boom and this one, Pickett continues, is that time and experience have produced savvy consumers. He says consumers are much more apt to shop around for the best deal. For example, with a few phone calls rate shoppers can discover that they may be able to obtain the same lower rate at one lender for fewer up-front points than another lender requires. Pickett says many applicants are opting to let their rates float with the market for a time, rather than locking them in at the soonest opportunity.

Aiding the shopper is the rise of mortgage brokers. These third-party originators often represent a selection of lenders, and can shorten the learning curve for would-be refinancers. They are better placed than the typical retail mortgage banking officer to tell borrowers what's out there, according to consultant Tom LaMalfa, president of Wholesaling Inc., Shaker Heights, Ohio.

A third difference between the two booms, according to Pickett and others, is that the mortgage lending industry is in a better position to handle the demand today. Increased automation is typically cited.

"We can knock off a set of documents in 20 minutes, versus an hour and a half before," says Howard J. Levine, president and CEO of ARCS Mortgage Inc., Calabasas, Calif. ARCS is the mortgage banking arm of The Bank of New York Co.

Lenders also say they've become smarter about staffing than they were during the last boom. At that time, many boosted their staffs, hoping the increased volume would last. When demand fell off, they were left with bloated organizations. …

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