Refinancing Of Home Loans Is Near a Peak
Fixed-rate mortgages at 18-year low, but could start to rise by spring. PERSONAL FINANCE
'YOU can't read a newspaper, watch the news, or have a conversation without the economy coming up," says Scott Sanderson, manager of Central Texas Mortgage Corporation.And as people fret over the economy, they also discuss the opportunity that lower interest rates give them to refinance their homes and save money, he adds. That awareness has more than doubled the number of refinancing inquiries at his Austin-based mortgage brokerage firm. "Heck, we have people calling us who just closed [on a home purchase] last year," Mr. Sanderson says. No wonder: 30-year fixed-rate mortgage interest rates averaged 8.49 percent last Friday, the lowest in nearly 18 years, according to a weekly survey by the Federal Home Loan Mortgage Corporation (known as Freddie Mac). And that day the Federal Reserve moved to push interest rates still lower by cutting the discount rate it charges banks to 3.5 percent - the lowest level since 1964. In October refinancings accounted for a quarter of the home loans made by all types of lenders, twice the usual percentage, says Frank Nothaft, a Freddie Mac economist. "It's picking up steam," adds Paul Paquin, senior vice president at the Federal National Mortgage Association (Fannie Mae). "The peak is definitely in front of us." Freddie Mac and Fannie Mae are government-sponsored enterprises. They buy mortgages or pool them and issue mortgage-backed securities to the lenders, which hold or sell the securities. This ensures that lenders have adequate money for mortgages. Mr. Paquin notes that in 1986, the last time interest rates dropped below 10 percent, most consumers waited until they hit bottom and then started back up before refinancing. When that happened, lenders couldn't handle the rush. Refinancing is not just a matter of having a new interest rate stamped on the mortgage, but requires documentation from an appraisal, inspections, survey, title search, and so on. Normally those things can be accomplished in a month, but might take four once the rush begins, he warns. Last time, lenders coped with impatient refinance customers by eliminating all or most of the loan documentation. But many were burned when these "no-doc" and "low-doc" loans went into default and the properties turned out to have declined in value. Paquin doubts that many lenders will be willing to take that chance again. So when will rates rise? Paquin believes they could turn upward by this spring. But others aren't so sure. Certainly the first uptick in rates will cause people to refinance who haven't already done so, Mr. Nothaft says. He says refinancing activity is "fairly close to the peak," however. That's because consumers are showing themselves to be more sophisticated and refinancing "ruthlessly," he says. At the Mortgage Bankers Association, senior economist Tom Holloway says interest rates are "still drifting down." The MBA expects rates to drop to 8.25 percent by next summer for 30-year, fixed-rate mortgages. After that, if rates go up he would expect a flood of refinancing applications. But he also predicts that refinancing will continue at a higher than average level for several years. Home mortgages are originated by savings and loan associations, commercial banks, or mortgage banks. Mr. Holloway notes that the nation's 2,000 mortgage banks used to have only 35 percent of the market. But with the boom in refinancing, their share has soared to 46 percent. One reason, he says, is that mortgage banks tend to offer the lowest rates for fixed-rate mortgages, and one reason consumers refinance is to lock in low rates. Mortgage banks report that 60 percent of their applications are for refin ancings, compared with 10 to 15 percent during times of flat interest rates. Commercial banks have not been very aggressive in seeking refinancing business, Holloway says. And thrifts have been losing market share because they prefer to offer adjustable rate mortgages (ARMs). Paquin says consumers have little interest in ARMs once rates fall below 10 percent. Mike Wilson, director of research for the 2,000-member United States League of Savings Institutions, agrees that thrifts are doing less refinancing than mortgage banks. Still, in October refinancings accounted for 21.6 percent of loan volume at the nation's savings and loans, versus 12.9 percent in October 1990. Mr. Wilson points out that mortgages only show up in the refinance category in thrift data if both the old and new loan are at the same institution. So thrifts may be busier in refinancing than they appear to be.