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Refis Are Out There; Just Don't Depend on Them

AUG 27, 2014 11:28am ET
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To paraphrase from the Wizard of Oz, "Ding dong, the boom is dead, the boom is dead. Ding dong, the refi boom is dead!"

Freddie Mac delivered the refi boom's final, official nail in the coffin in its second quarter refinance report released in August. And it had been a good run, nearly six years. But as "Dandy Don" Meredith used to sing on Monday nights, "Turn out the lights, the party's over."

However, even though for years industry economists had been predicting the end of the boom, there are mortgage originators that didn't prepare for this inevitability. They have yet to adjust their business plans (if they even had one in the first place) to respond to the shift to a purchase-dominated market.

These originators are hoping that somehow, someway refi customers will continue to walk through their doors, call on the phone or fill out an online application.

To be sure, there will still be plenty of refinance business (at least in the short term). But it won't be enough to sustain all those originators who've grown accustomed to depending on it during the boom years.

The refi opportunity isn't just with consumers who recently became eligible for the Home Affordable Refinance Program because their property values have increased enough to get them into positive equity. Another opportunity exists with consumers who are currently in Federal Housing Administration-insured mortgages. The changes to this program have taken away the consumer's ability to cancel their mortgage insurance policy.

For these borrowers, there's an opportunity to refinance them into a conforming loan with private mortgage insurance. The selling point is that the borrower-paid mortgage insurance product can be cancelled when the loan-to-value ratio reaches 80%, said Jim Blatt, who is the CEO of Mortgage Returns, a customer-relationship management technology vendor. But these are not the low-hanging fruit refi customers of the past six years; it will take a strong marketing plan to capture their business.

Or, world events may end up bailing out those who have failed to prepare for a purchase-driven market. The situation between Russia and Ukraine, as well as what is happening in the Middle East could bring investors back into the bond market, driving the price of Treasury bills up and the yields down.

Some economists have postulated it will take mortgage interest rates to fall below 4% to see significant growth in refinance volume. While global unrest may spark a flight-to-quality by investors that could cause rates to drop, originators shouldn't count on that driving new business.

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