Low Rates Fuel Refi Boom

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"This month may make our year," says Tom Ward, president of Majestic Mortgage Corp. Normally, January is a slow month for the Mundelein, Ill., lender because of the harsh Chicago weather. But this has been the firm's best January ever.

"Business is up 60 percent, and it's all from refinancing," Ward reports. By comparison, Majestic didn't refinance a single loan last January.

At PNC Mortgage, volume is up 40-45 percent because of home owners "looking to refinance," says Tony Meola, executive vice president of production for the big national lender.

"It's starting to look and feel like the '98 refi boom." Maybe so, but the Mortgage Bankers Association in Washington isn't quite ready to pronounce the run a full-fledged boom. Not just yet, anyway. For now, it's more of a burst than anything else.

"If we stay at this level of activity, we'll call it a boom," says Doug Duncan, the MBA's chief economist. "It has to be sustained." The good news is that the current rush actually began several weeks before the Federal Reserve Board, in a surprise move in early January to jack up the slowing economy, cut short- term interest rates by 0.5 percent, or twice the more usual 0.25 percent step.

The Fed's cut in the federal funds rate (the rate financial institutions charge one another for overnight loans) sent long-term mortgage rates to under 7 percent for the first time since April 1999, according to Freddie Mac, a secondary mortgage market company which purchases loans from local lenders.

But because of the weakening economy, rates on home loans had been trending down since May 2000, when they reached 8.64 percent. And people were already taking advantage of the decline when the Fed shocked the markets.

For example, Countrywide Home Loans, the nation's largest independent mortgage company, refinanced more than $1.9 billion worth of loans in December alone. That was a 91 percent increase over December '99 and helped push the Calabasas, Calif.-based company's fundings up by almost 50 percent.

By contrast, last summer, only 7 percent of Countrywide's loans were the result of refinancing, the lowest rate in the firm's 32-year history.

Still, Duncan, the MBA economist, says boom status won't be conferred unless mortgage rates remain around 7 percent or dip lower than that for six months or so. "Right now," he points out, "we're only a couple of months into it." Keith Gumbinger of HSH Associates, a Butler, N.J., publisher of mortgage data, isn't ready to use the "b" word, either.

"I can't go quite that far," says Gumbinger, whose firm surveys 2,500 lenders on a weekly basis. "It's more like am echo. The refi boom of '97-'99 was far deeper and wider. This time around, there are somewhat fewer people available because rates haven't been all that high."

Nevertheless, the MBA is predicting that mortgage rates should average just about 7 percent for the year, so, says Duncan, "it should be a big year for refinancing." So big, in fact, that the trade group saw fit to revise its forecast for mortgage originations for 2001 upward to a whopping $1.412 trillion. Only a month ago, the MBA was predicting loan volumes of $1.155 trillion for the new year.

Furthermore, whereas original estimates were that 26 percent of the smaller number would be the result of home owners trading in one mortgage for another, the latest projection is that refinancing will account for 39 percent of all lending in '01. Other market watchers are suggesting that total originations could go even higher this year than the MBA thinks. For example, Indeed, Credit Suisse First Boston, a Wall Street investment bank, says 45 percent of the nation's $4 trillion in outstanding mortgage debt $2.2 trillion is ripe for refinancing.

But even if it turns out the MBA's lowball estimate is right, this will still go down as the second best year ever for the home loan business. The only year they did any better was in 1998, when they wrote $1.507 trillion worth of mortgages.

Back then, though, half of all loans were the result of refinancing. So even if the current burst does in fact become a boom, it won't be as big as '98.

But even a somewhat smaller boom will be plenty big enough to put ear-to-ear smiles on the faces of a lot of lenders and a lot of home owners, too. The only question now is, when to pull the trigger? Do you get greedy and wait to see if rates continue to subside? After all, the Fed is widely expected to take rates down another quarter percent again when it meets tomorrow. And some analysts believe another 25-basis-point cut is in the offing after that.

Or do you take advantage what you can get now? And why not? If mortgage rates do drift lower, you can always refinance again and again and again, if you like.

The smart money says act now, if not sooner. For one thing, most observers believe current mortgage rates already take into account next week's anticipated short-term rate cut.

"There's always a little push, but it won't be anything more dramatic than an eighth of a point at best," says Meola of PNC Mortgage.

For another, Fed cuts sometimes result in higher, not lower, mortgage rates. In fact, according to an HSH analysis, within four weeks of the four of the last six rate cuts, mortgage rates were higher then before the Fed acted.. Not a lot higher, but higher nonetheless.

"Fed moves can bring unintended consequences," warns Gumbinger. "Mortgage rates have been declining lately due mostly to the weakening economy even as the Fed sat on the sidelines. Now, the Fed is back in the game, and those looking for significantly lower mortgage rates ahead may be disappointed."

Gumbinger's advice: "If you can find a mortgage package which makes sense, take it."

Ward of Majestic Mortgage agrees. "The last thing you want to be is paralyzed," says the 13-year mortgage industry veteran, noting that many of the people who are calling him now are the same ones who waited too long the last time rates were tumbling. "They don't want to miss out this time around."

"Trying to pick and choose the best rate is like trying to pick the low point in the stock market; you can't do it," adds Meola. "Besides, the 7 percent range is still an excellent rate."