Refinancing cools, fewer lenders needed

When Doug Klein launched Front Range Mortgage Professionals in Loveland in 1999, competition was slim.

“There were maybe four of us then,” he said. “Now, just open the Yellow Pages and youll see at least 18 and thats just in Loveland.”

Over the past three years, low interest rates have created a refinancing frenzy, along with an influx of new entrants into the mortgage lending business.

In fact, refinancing activity in 2003 accounted for a whopping 66 percent of all mortgage originations in a record-setting year that saw $3.8 trillion in loans.

Refinancing accounted for 59 percent of 2002 totals and 55 percent of 2001 numbers a stark contrast to 2000 levels when only 19 percent of mortgage originations came from refinancing.

Drop in activity in 2004 expected

But following what seems to be the mortgage industrys mantra what goes up must come down the Mortgage Bankers Association predicts that total mortgage lending volumes will drop in 2004 along with refinancing activity. The national trade association predicts that in 2004 refinancing will account for only 46 percent of the total mortgage origination volume, expected to reach $2.5 trillion. If the forecast proves true, the refinance market of 2003 will equal the total volume predicted for 2004.

Still, that $2.5 trillion prediction is a 25 percent increase from earlier forecasts for 2004 an upgrade the MBA attributes to persistently low interest rates.

Tied to the interest rate, the mortgage lending industry regularly experiences busts and booms. But long-term lenders say the latest slowdown is really just a normalization of the market.

“Certainly there will be a thinning out of some folks,” Klein said. “But that always happens.”

Klein said his loan volume is currently split 50-50 between refinancing and new purchase loans. In the first half of 2003 it was more like 60 percent refinancing, he said, adding that he expects the pendulum to swing in 2004, resulting in a balance of 40 percent refinancing and 60 percent new purchases.

“I think the whole industry has gotten spoiled in the last few years,” Klein said. “Its been a crazy few years, and I really see it as returning to a normal, healthy volume.”

Numbers peaked in September

Data from the Bureau of Labor Statistics shows that in September 2003 the number of employees in the credit intermediary sector peaked at 2.81 million nationally. By February that number had dropped to 2.78 million.

Statewide, 2003 started the year with 48,800 employees in the credit intermediation sector. By August, the number grew to 51,500 but began leveling off again. By January it dropped to 50,800.

“There are lenders who are laying off. There is change in the industry,´ said Charlotte ODonnell, community resources director, for the Colorado Mortgage Lenders Association. “Still, the rates are very competitive compared to six months ago.”

The average interest rate for a 30-year fixed mortgage in the third quarter of 2002 was 6 percent. In early March, the figure dropped to about 5.25 percent, but the MBA predicts that the rate will sit at 5.5 percent for the first quarters average. The quarterly average is expected to remain below 6 percent until the beginning of 2005.

“Refinancing has slowed down, but people are saying that its not dropping any more but rather that it has leveled off,” ODonnell said.

The state association has seen its membership increase 20 percent from 2002 to 2003, now totaling 360 industry members or about 4,500 individuals.

“Were not seeing a lot of companies going out of business,” ODonnell said. “But the small guy who came in here to do a quick fix is probably not going to survive very well.”

Many loan officers work on commission or contract, so when volumes drop, some may leave the position or the industry and most official layoffs come from the production side or related businesses.

More normal market?

As vice president of Land Title, Kerry Grimes oversees five Northern Colorado locations. “We were probably at least 150 percent above our normal volume last summer,” he said. “Then in the fall we returned to whats considered a normal market.”

In the peak months last summer, local Land Title operations employed about 85 people. Today there are only 55. A large number of the cuts came from contract positions that Grimes said were added with the knowledge that they would last only as long as the boom.

Wells Fargo Home Mortgage also eliminated several local positions at the end of 2003. “We had to do some rightsizing of the local operations,´ said Mark Hensler, branch manager for the Larimer County locations. The company also relocated its processing operation, Hensler said, but could not provide figures for the number of jobs lost.

The cutbacks were due to the market shift, Hensler said. Last summer, 70 percent of his loans were refinances, he said. Today, its an even split between refinancing and new purchase activity.

But make no mistake: Industry members say the refinancing market is still alive and well, its just settled from the maniacal pace of previous years.

“Ive seen information that says that over 35 percent of the population would still benefit from refinancing,´ said Terri Evans, a loan officer with Americas Mortgage in Loveland. “But a couple of years ago it was over 70 percent.”

When so many homeowners have already capitalized on the low interest rates, mortgage lenders begin to see other areas of the market open up.

“One area where well see big growth in the next few years is second mortgages,” Evans said. “Their first interest rate will be so good they wont want to touch it.”

Interest-only plans, where lenders pay only the monthly interest, are also gaining in popularity, Evans said. “I just had a customer who has 50 percent equity in his home and he has two kids in college,” she said. “Interest-only worked very well for him because he needed the monthly savings to pay for tuition. He doesnt need more equity at this point.”

Adjustable Rate Mortgages are also seeing more activity, accounting for about 42 percent of the total dollar volume, according to the MBA.

“The old 30-year fixed is not the only thing out there,” Evans said.

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