A Post Refi Boom Environment: Now the 'Fun' Begins

For the past several months I've been contemplating writing a column about how the mortgage and housing markets have become a sustainable industry onto themselves. By that I mean the time has come that housing and mortgages are no longer cyclical - that these two industries (which go hand-in-hand) can be counted on for steady and predictable growth.

The key words here are "predictable" and "steady." For the past two years the mortgage and housing industries, indeed, could do no wrong. These two businesses (as most everyone knows) have been the twin pillars of the U.S. economy, preventing the recession from feeling really ugly while fueling job growth for those lucky enough to be employed in these businesses.

Many a consumer has saved a ton of money by refinancing their residential debt. (Smart multifamily owners have saved a ton of money as well.) And who cares that all the money consumers saved by refinancing has been gobbled up by higher real estate taxes forced upon them by ailing state and local economies? And don't forget higher natural gas and fuel costs. Yes, for some consumers (though they don't quite realize it yet) their big refi savings have vanished into thin air.

Yes, it seemed as though the good times would last forever and that the stock market would never, ever recover. Viva mortgage banking! Viva home sales!

At one point two months ago, I remember looking at the box only to see the yield on the 10-year Treasury (which mortgages are pegged to) falling to just below 3.2%. Later research discovered that at one point in intra-day trading the yield actually fell to 3.11% - a 45-year low. Hard to believe.

As I write this, fall approaches, and as most of you know (if you don't know you can stop reading now) the yield on the 10-year is north of 4.4%. As Fannie Mae chairman Franklin Raines recently pointed out to reporters, just 39% of mortgages are "in the money" to refinance as opposed to about 90% back in June. Ouch!

The weird thing about the pullback in the bond market is that equities have not really rallied much, at least not over the past few weeks. On some days bonds fell in price right along with stocks. What's going on here?

Who knows. The big question for mortgage bankers is this: what's the rest of the year going to look like and what's in store for 2004? Predicting interest rates is a bit like predicting the weather. It's more of an art than a science. The best mortgage and housing economists have been wrong about rates for two years running.

As noted in previous columns, when rates rise at least one sector of the industry will benefit - mortgage servicers. If refis indeed dry up, firms like Washington Mutual, Wells Fargo and Countrywide (and others) can fall back on their massive servicing portfolios as a source of steady income.

In a rising interest rate environment, servicing rights (mortgage receivables) become golden. As for firms that gorged on refis, well, your time is up, that is, if rates don't start falling again. Then again, this is a monthly column. By the time you read this, the yield on the 10-year may've plunged again but somehow, this time around, I doubt it.

The next few months could be very telling. Will the yield on the 10-year keep rising steadily? Will the industry see the return of the 7% mortgage, and if so, what will it mean for the production side of the business? Will home prices finally level off or decline as homebuyers begin to get more choosy? Once the refi boom ends will the servicing side of the mortgage industry consolidate even more? Will firms that have servicing sell in order to survive while praying they can make it until the next refi boom?

There are plenty of questions to ask. And the only place to find the answer is by looking at the yield on the 10-year Treasury. This industry rises and falls on the 10-year. And that column I was going to write about the industry loosing its cyclical stripes? I'm shelving it.

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