Churning Slows as Underwriters Tighten Screws

It's no secret that getting a mortgage loan is more difficult today than it was a couple of years ago. Also, the panoply of loan products available to borrowers has shrunk as lenders have abandoned some of the gamier loan products that helped to stretch the buying qualifications of borrowers during the housing boom times.

Homebuyers are not the only ones affected. Many borrowers are finding it more difficult to refinance a home loan as well. While that may pose problems on the credit risk side of things (just ask people who are trying to replace an option-ARM with a more stable loan), it may provide an indirect benefit for loan servicers: less portfolio churning.

Data from Freddie Mac seems to bear this out. The refinancing share of new loans has dropped in recent months, despite relatively stable long-term mortgage rates. Just 38% of new conforming loans were for refinancing in June of this year, according to Freddie. Earlier in the year, the refi share had hovered between the mid-40% and mid-50% range.

And economists at Freddie Mac predict the refi share of loan applications will continue to dwindle downward, totaling 35% in the third quarter and 30% in the fourth quarter of this year. Looking further ahead, they anticipate the refi share will remain around the 30% range next year, with a forecast that the average note rate on 30-year, fixed-rate loans will range from 6.7% to 7% next year. Forecasting rate movements even one year into the future is a dicey business, and rates actually slipped a bit in early September as a slowing economy continued to raise recessionary fears, but Freddie Mac's track record isn't bad.

The housing downturn itself is contributing to the refinancing slowdown. With home values stagnant or falling in most of the country, the number of homeowners who might refinance to tap into their home equity is also shrinking.

Economists at Fannie Mae also see little evidence that rates will decline enough to prompt a new round of rate-induced refinancing. In a recent economic commentary, Fannie Mae chief economist Doug Duncan and his colleague Molly Boesel say that the uptick in mortgage rates that was seen in late summer reflected not only inflationary concerns in the economy, but also a higher risk premium demanded by providers of mortgage credit. The spread between prime credit quality home loans and Treasury rates has continued to widen in recent months, they noted.

However, at least for the full year, the Fannie Mae team is more bullish on refinancing volume, predicting that it will total 51% of home loans originated in 2008. They note that borrowers with upward adjusting hybrid and ARM loans, taking advantage of still-attractive fixed-rate alternatives, have been boosting refinancing volumes.

But overall, they don't see much growth for the servicing industry, projecting that mortgage debt outstanding will grow by just 2.3% this year, and perhaps not much more in 2009.

That's the impact that a slowdown in purchase money lending and cash-out refinancing is having on the mortgage servicing side of the business. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/