Reconveyance Burden Not Letting Up

Mr. Stewart is senior vice president of Nationwide Title Clearing.

2002 was yet another record year for mortgage lending, closing out with nearly $2.5 trillion in new mortgages on the books. The record volume stretched the system to the limit, swamping county recorders and servicers reconveyance staffs with record volumes of newly recorded releases.

Most industry forecasters, however, believe that demand may have finally peaked and a turn in the long-term rate trend is at hand. In order to understand what to expect in 2003's mortgage and refinancing trends - and the reconveyance demand that goes with them - let's take a look at the anatomy of some previous years.

First of all, let's look at how different homeowner needs motivated previous refinancing booms, notably the 1993 and 1998 refinancing booms. According to Doug Duncan, the MBAA's chief economist, 1993's refi boom was driven by a desire to improve household cash flow. In other words, homeowners were refinancing existing mortgages not to pull out equity, but to reduce the amount of interest paid and thus lowering their monthly payments. The evidence, Duncan points out, lies in the Federal Reserve's debt burden ratio, which, after the '93 wave of refinancings, dropped to its lowest level in almost 20 years. (The household debt- service burden is the ratio of household debt payments to disposable income, and it is easy to see how lower interest costs would drop the ratio.)

1998 (previously the biggest mortgage year on record with $1.5 trillion in new originations) differs from '93 in terms of homeowner motivation. As mortgage rates fluctuated between '93 and '98, homeowners had turned to ARMs and 5-year balloon notes in the belief that rates would turn downward again. So, when long-term rates capitulated in '98, those same homeowners seized the moment and converted to fixed-rate loans, locking out the risk associated with their mortgage ARMs. Duncan calls the '98 refi boom a "product rearrangement" period - a time when homeowners, rather than just hunting for better cash flow or equity, wanted to change the type of mortgage product on their balance sheet. He points out that there was also a pretty strong move to 15- year loans in '98 as well.

The seemingly endless refi boom that started in 2001 is different yet again. Understanding it can help us see what the future holds for the industry. In 2001, the theme of refinancing changed to "cash out." The meltdown of the dot-coms and the recession in general convinced homeowners that it was time to tap their equity in a big way. Low and sliding mortgage rates made it just that more tempting, and there was certainly a lot of equity to be tapped. In fact, single-family home values across the nation had increased by nearly 30% in five years, so the amount of available cash through refinancing was more than double what it was in '93. Then, in November of 2001, rates moved as low as 6.4% for a 30-year fixed mortgage and homeowners lined up to take advantage. Duncan points out that about $80 billion in equity was tapped, of which $30 billion was used to restructure debt. Homeowners consolidated credit cards and second mortgages into new loans or generally pulled out cash to "rearrange their balance sheet."

With single-family home values moving up another 7% in 2002, the same trend continued with an additional $75 billion in equity converted through refinancing into consumer spending last year. Many economists believe that the liquidity generated by these refinancings was a key ingredient in keeping the economy afloat and preventing a more serious recession. Rates continued to slide through last year as well, dropping mortgage interest to 40-year lows and helping to bring more new buyers into the housing market.

Servicer reconveyance departments all over the country were on high alert to control release backlogs and avoid statutory penalties. Major servicers turned to outsourcing to solve the crisis, with many adopting outsourcing as a permanent solution to their release processing. Their reasoning is reflected in the simple economies of scale of document preparation and recording. The largest and most competent outsourcers process many times the number of releases than any one servicer. Thus, they can reduce the cost of release processing to a level servicers can't match internally. Furthermore, a few of these larger vendors guarantee to remove lender's statutory risks and indemnify them against actions by homeowners. It's a practical solution.

Servicers that are still struggling with in-house release processing should look to outsourcing as a permanent solution. According to the MBAA's worldview of 2003, mortgage rates should rise slightly this year, but remain low. With a more even pace of home sales, there should be a better balance between buyers and sellers in 2003. As a result, the increase in home prices - although slowing to historic norms - will continue to provide additional equity that consumers can "cash out." Thus, the refi share of total mortgage production will remain strong and significant though the year.

Reconveyance demand is driven as much by new financings as it is refis. Since the MBAA's housing demand forecast is for this year to be the second largest on record in terms of mortgage originations - only 2% less than last year's record pace - the industry can expect another year of intense document processing and recording.

There's another element to take into consideration in predicting the demand for releases, however. Duncan believes that we are seeing an underlying change in the way homeowners manage their balance sheet. In the beginning of the '90s, Duncan points out, the annual refinancing rate was around 15%. Now, he thinks that rate is closer to 20 or 25%.