Mortgage originators enjoyed a decent second quarter with loan production rising a respectable 7% from the first quarter, but there is fear and loathing in the industry about what lies ahead when refinancings begin to wane.
According to exclusive survey figures compiled by National Mortgage News and the Quarterly Data Report, mortgage bankers funded $357 billion of one-to-four family mortgages during the period with refis accounting for about 70% of all new loans.
But over the past several weeks refi applications have risen to 80% of new production, a sign that consumers—fearful of getting laid off—just will not commit to buying a home or venture into the "move up" market.
"I think the purchase market will continue to be flat through 2010 and into next year," said Michael Fratantoni, vice president of research and economics for the Mortgage Bankers Association.
Lenders originated $680 billion of home mortgages during the first half, according to NMN's research. The MBA is actually forecasting loan production of $400 billion for the third quarter, but sees that number falling dramatically to $280 billion in the fourth quarter.
As might be expected, the origination market was bolstered by well-publicized federal tax credits for homebuyers, but the benefit expired this spring. Some contracts entered into before the expiration date will result in loan closings that occur in the current quarter.
For now, refinancings are the only game in town. Some lenders are even hiring additional staff—such as Foundation Financial Group of Atlanta and PNC Mortgage—but there is a fear that when refis run their course the industry could face an ugly contraction unless home buying begins to increase from its current rock-bottom levels.
Even though there is some hand-wringing going on, Freddie Mac (in a sense) is somewhat optimistic, predicting that loan production will total $1.4 billion this year with next year being about the same.
Fratantoni said the trade group is in the process of updating its outlook and will unveil a new forecast at its annual convention in Atlanta next month. He fears that "at some point we will turn the corner on rates and refis will disappear."
Lenders interviewed by NMN over the past few weeks are particularly concerned about the jumbo market where refis dominate even more.
There have been scattered reports that very few jumbo loans are being sold into the secondary market these days and that the nation's megabanks and regionals are funding these nonconforming loans, keeping them in portfolio.
If the trend continues it will hurt nondepository conduits that are hoping to revive the private-label securities market in the quarters ahead.
However, there may be one ray of hope for the nonconventional market: a new trade group that represents “hard money” lenders is up and running and is seeing renewed interest in the business.
Walter Grove, executive director of the American Association of Private Lenders (formerly known as the National Hard Money Association), said his membership is up to 80. "Most are lenders, not service providers," he said, adding that interest in the sector is increasing.
He cautioned that his members are interested in "quality lending" and want to avoid the subprime lending standards of the past decade. "Many of those firms are gone and the industry is better off for it," he said.
One veteran mortgage banker who is now in the hard-money space—but in a minor way—is Dan Perl of Citadel Loan Servicing of Southern California.
Citadel is a specialty servicer and investor in troubled mortgages but Perl, who has managed both depositories and nonprime lenders during his four-decade career, said he would like to expand his small hard-money business. "I'm in it, but not in a big way," he said. "I'd like to be bigger."
His firm currently requires that borrowers have a large amount of equity and charges 11% or more.
