Mortgage boom takes a breather

Published: Sunday, January 19, 2003 at 6:01 a.m.
Last Modified: Sunday, January 19, 2003 at 2:38 a.m.

The refinancing boom may be starting to cool.


Taking Advantage

If you're getting ready to refinance:

  • Opt for a fixed-rate loan. The current average of 5.94 percent for a 30-year loan is among the lowest in decades.

  • Consider a 15-year mortgage. With rates averaging just 5.36 percent, you may be able to pay off your loan more quickly without increasing your monthly payments.

  • Ask your lender to lock in current rates. That protects you if rates rise before your loan closes.

  • While mortgage loan activity still remains high, that's partly because lenders have been beefing up their marketing efforts and pricing loans more aggressively to keep the business flowing.

    If lenders were pricing loans as they did in October, long-term mortgage rates could be nearly 6.5 percent right now, frightening off many homeowners. But instead, lenders are cutting into their own profits, reducing the spread they add to a key interest rate. The goal: to keep the two-year-old frenzy going. As a result, many people have been able to keep locking in 30-year mortgages at rates close to 6 percent.

    Still, the industry is bracing for a sharp slowdown, following last year's torrid pace. The Mortgage Bankers Association is forecasting that loan volume will fall by as much as 28 percent this year, from the record $2.5 trillion last year. That's in part because economists are expecting rates to climb as the economy improves, damping demand for new loans.

    Such a drop in new mortgages would affect the entire U.S. economy. During the past two years, an unprecedented refinancing boom has allowed millions of homeowners to lower their monthly payments and pull out extra cash. Nearly one-fifth of the economy's growth since late 2000 is directly tied to the refinancing wave, according to estimates by, a consulting firm in West Chester, Pa.

    People have been predicting for some time that the explosion in borrowing would end, largely because so many homeowners have already refinanced. But a falloff in November and December refinancings gave the industry, which has hired more than 100,000 workers in the past two years, a taste of a leaner future.

    The volume of loan applications from people seeking to refinance their mortgages dropped 1 percent last week, compared with the previous week, according to an index compiled by the Mortgage Bankers Association. (That followed an estimated 29 percent surge in the week ended Jan. 3, compared with the previous week, after rates fell to record lows.)

    Still, even if the refinancing boom were to grind to a halt today, the impact on the economy wouldn't be immediate. Lenders' pipelines are still filled with loans originated in the fourth quarter, and many consumers have yet to spend all the cash freed up by refinancings. Over the longer term, economists are betting that a falloff in refinancing will be offset by a pickup in economic growth, which will boost employment and the average workweek, putting more cash in consumers' pockets.

    What should homeowners do? If you were put off by long waits when you tried to refinance before, pick up the phone now. "There might be another dip, but my guess is rates probably aren't going to get significantly better," says Keith Gumbinger, a mortgage analyst with HSH Associates, financial publishers.

    In October, borrowers who contacted one of U.S. Bancorp's toll-free mortgage lines were told their calls would be returned in two to three days. A recent call to the same number produced a rate quote almost instantaneously. At Citigroup's mortgage unit, call wait times are down 40 percent from last fall's highs, says David Schneider, president and chief operating officer of CitiMortgage.

    "We are still finding some delays here and there, but nothing as extreme as we saw in October and November," says Mr. Gumbinger of HSH, which calls lenders daily for its survey of mortgage rates.

    Already, some lenders are stepping up their marketing. Early this month, Countrywide Financial's home-loan unit mailed out solicitations to hundreds of thousands of its current customers suggesting they could save money by refinancing. At Citigroup's mortgage unit, the marketing budget is up 40 percent this year. Wells Fargo's mortgage unit is doubling the solicitations it mails to homeowners it thinks could still profitably refinance.

    Leo Petrini was looking to open a second checking account for his consulting firm when he walked into a Wells Fargo branch in Minden, Nev., last week. A Wells Fargo banker told Mr. Petrini he was a candidate for refinancing. "She promised to have a mortgage specialist call me," says Mr. Petrini, who took out a $265,000 one-year adjustable-rate mortgage with a 4.25 percent rate in September and is now looking for a fixed-rate loan.

    Lenders are also becoming more aggressive when it comes to pricing. The spread, or difference, between 30-year mortgages and 10-year Treasurys now stands at 1.99 percent percentage points, according to HSH, the lowest level since July. Back in October, when many lenders had more business than they could handle, spreads climbed to as much as 2.49 percentage points.

    The narrowing spreads are "a sign that all of us are being more competitive," says Cara Heiden, head of consumer lending at Wells Fargo Home Mortgage.

    At the same time, lenders are rolling out new products aimed at home buyers. U.S. Bancorp, for instance, will introduce three new types of loans aimed at first-time home buyers later this month. CitMortgage is introducing a construction loan for home buyers that turns into a 30-year fixed-rate mortgage once the home is completed.

    Though still near historical lows, mortgage rates are now a bit higher than they were at year end. Rates on 30-year conforming fixed-rate mortgages now average 5.94 percent, up from a record low of 5.85 percent on Dec. 31, according to HSH Associates.

    To be sure, lenders could see "a major pickup activity" if mortgage rates drop by a quarter of a point, says Lakhbir Hayre, a managing director at Salomon Smith Barney. Still, Mr. Hayre is forecasting a gradual slowdown in refinancing activity.

    Despite the aggressive marketing, the fact remains that many homeowners who could refinance already have. "Consumer interest is still strong but it's off the peak levels of demand," says Doug Perry, a first vice president with Countrywide Home Loans.

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