Refinancing Starting to Boom

The recent drop in interest rates combined with relatively low home prices has driven up mortgage refinance applications in many markets across the country. And for the last several weeks, lenders have seen spikes in refis.

Despite the negative news regarding subprime loan issues, rising foreclosures and home price depreciation, consumers are getting the message that home financing opportunities are alive and well, according to Scott Stern, CEO of Lenders One here.

The Fed lowered the funds rate 120 basis points in 10 days, the largest drop in history, he said. "Consumers realized the impact it had on mortgage rates. They are contacting their lenders about refi opportunities in heavy numbers."

For Lenders One member companies from coast to coast, North to South, from Florida to Illinois, Washington state to California, origination volume for refinances are very high, he said.

"The biggest activity is for traditional agency borrowers, the ones who are not in trouble. These are A-paper good borrowers, looking for a rate and term refinance."

Of course, many borrowers are refinancing to relieve pressure of bad loan products the industry saw in abundance over the last couple of years. Near-record numbers show borrowers are refinancing out of subprime loans into FHA, he said. Statistically speaking, in January 2007, 1% out of $3 billion in loans were FHA refinances for the company. That amount was 30% in February 2007, said Mr. Stern.

"FHA has always been a superior product for borrowers with less-than-perfect credit. It's one of the most encouraging stories to come out of the subprime issue over the last 12 months."

According to the Mortgage Bankers Association's Weekly Mortgage Applications Survey for the week ending Jan. 25, refinance share of mortgage activity increased to 73% of total applications from 66% the previous week.

Refinance applications are up 92% since the beginning of November and purchase applications are up 7%," said Jay Brinkmann, the MBA's vice president of research and economics.

For the week ended Feb. 1, the refinance index decreased 1% to 5054.0 from 5103.6 the previous week and the seasonally adjusted purchase index increased 12% to 405.3 from 362.0 one week earlier. The refinance share of mortgage activity decreased to 69.2% of total applications from 73% the previous week.

Consumers have heard over and over again the news regarding the mortgage crisis on television and on the Internet, said Steve Jacobson, president of Fairway Independent Mortgage, Sun Prairie, Wis. "There is so much more awareness about the mortgage market in general. We're all looking at our personal situations. Right now, we're seeing more refi applications."

Fairway Independent Mortgage saw its best year in 2007, Mr. Jacobson said, with $62 billion in volume. Acting as a mortgage banker, closings were up 92% from February 2006. Correspondent loans doubled its business, producing $265 million through its warehouse facility expected for this February. The company's volume has run about 50/50 purchase to refinance.

"January and February are typically slower. In March or April, the spring market comes up. Increased refis are being seen industrywide."

If business doubles, that means lenders have to deal with capacity issues from a personnel standpoint. "It presents different business issues. Hire temps. Focus on how you train them. The challenge is finding the right people and bringing them in and training them. These are good problems to have."

At First Houston Mortgage, the company saw 75% purchase loans and 25% refis for 2007. This year so far, the company has locked in half of its total refinance volume for 2007.

"That's a really good start of what could be a refi boom," said First Houston president David Zugheri. "I think it will help consumers, these people who wanted to get out of ARMs and into a low fixed rate. Mortgage companies should be able to build origination volume."

The bad side of this change is for the servicer who paid to originate the loans, added Mr. Zugheri. "The loans we're financing were originated in the last two to three years. It could cause fairly serious runoff. This will be tough for servicers, because they have to buy the loans all over again. With new refis, they will be regurgitating their pipeline." In addition, questions have been raised about rejection rates (see related story, page 2).

Mr. Zugheri calls the rise a "quiet refi boom" because lenders are taking a more conservative approach to the changes, not bringing in a lot of new people into the industry. "Last time we learned we don't want to take a waiter or a taxi cab driver or someone right out of school and teach them the mortgage business. We're being cautious to hire, not ushering in the masses to field phone calls for refis like we did in 2003."

This refi boom is different from what happened during 2002-2004, added Mr. Stern from Lenders One. "We were creating homeowners using products that had relaxed underwriting guidelines. Anybody who wanted a home could get one," he said.

Mortgage refinancing can be a consistent source of business, added Mr. Stern, especially as borrowers focus on debt consolidation loans and refi their credit cards and car payments.

"It's about financial motivation. Today, we're seeing lower rates, better products and pretty standard underwriting practices, based on their willingness to repay. Borrowers don't want to just lower their rate, they want to know their lender will deliver the terms they promised and will be at the closing table on closing. They should do the research to find good lenders."

Lend America, Melville, N.Y., has seen an influx of business in FHA loans originated from last year. The percentage rose from 75% of the company's business in January of 2007 to 95% of its business in January 2008. Approximately 85% were refinances, said Heidi Frigano, vice president of sales, who added that that first-time homebuyer purchases are also increasing.

"We are seeing people refinance who in recent years got financing that wasn't good for their budget. Borrowers are finding themselves in a bad situation. Foreclosure is the reality, a growing statistic," she said.

"I've seen what some of these clients are going through. They have been in an ARM with a low teaser rate or option ARM or interest-only. Their back is against the wall, and we are helping out with FHA and secure a 30-year fixed. If rates do drop, they can call the lender and get the rate reduction. It's a very nice part of having this type of loan."

Even as foreclosures are mushrooming, a large percentage of loans are performing, and there are plenty of people with lower interest rates who are in a good position to refinance.

Marc Savitt, president-elect, National Association of Mortgage Brokers, agreed that refinancing is a great opportunity for consumers to consolidate debt and for those with ARMs in the low 5s and 4s to get a fixed rate. "This is good for the industry," said Mr. Savitt. "Interest rates have not gone above the 6s. They're still very attractive. I think we're looking at this continuing for a year or so." (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/

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