At a time of uncertainty, one thing remains definite – low mortgage rates.
Mortgage industry analysts initially had predicted a refinancing boom for most of 2002, but with the 30-year fixed rate historically below 6 percent and interest rates continuing to fall, that boom has lasted into 2003.
In Massachusetts, mortgage industry experts who have witnessed the benefits of refinancing for years say the end is nowhere in sight.
“Refinancing in Massachusetts has never really stopped booming,” said Stephen Tomaselli, cofounder and president of Loansnap.com, a Massachusetts-based mortgage broker and lending company servicing New England clients with online mortgage information. “From what I hear, refis haven’t accounted for less than 66 percent of the market … but the end of the summer in 2001 is when things really took off.”
According to Tomaselli, the history of refinancing has been cyclical in nature, peaking and leveling off in predictable waves. But this year, he said, there are no signs of a refi plateau.
“We’ve gone through eight- to 12-month [refinancing] cycles where there is a boom and then a cooling-off period,” said Tomaselli. “I expected the same [cycle] this time, but we still haven’t seen the cooling-off period. To predict the end [of the boom] is like trying to predict when the sun is going to come up. Eventually, it’s just going to happen.”
According to industry analysts, while the nation waits for signs of economic improvement and anticipates the outcome of the war with Iraq, money continues to flow out of the stock market and into the mortgage industry.
“We are likely to see signs of volatility, if nothing else, at least at the moment and over the next 30 days because we have been under the cover of so much uncertainty with [a prolonged threat of] military conflict,” said Keith Gumbinger, vice president of New Jersey-based HSH Associates, a publisher of mortgage and consumer loan information. “It [later] became very clear … we [were] going to war and therefore, we are removing the uncertainty which, in a perverse sort of way, has cheered investors.”
Gumbinger said bond markets have been selling off rather appreciably and last week posted some “fresh record lows,” but since then, interest rates rose about one-tenth of a percentage point and are slowly climbing.
The average interest rate on the 30-year fixed-rate mortgages dropped to 5.61 percent for the week ending March 14, as reported by Freddie Mac. That surpassed the previous record of 5.67 percent, set the previous week. One year ago, rates on a 30-year mortgage averaged 7.08 percent.
“We have been busy since last summer when the boom started and in Massachusetts, this has been the biggest refi boom we’ve seen,” said 1st New England Mortgage Corp. Sales Manager Larry Katzman. “In February, we exceeded any previous month by 40 percent in originations. Rates are continuing to climb, mostly because of the stock market rallying and the … war, but people who refinanced months ago are coming back and refinancing again.”
Even before the war began, industry analysts said the recent mortgage rate declines were stimulated by falling rates in the U.S. Treasury bond market and influenced by the effect of an anticipated conflict with Iraq.
“The profound lack of places to put your investable money has funneled enormous amounts of cash into treasuries and U.S. securities,” said Gumbinger.
“Even though the outcome [of war] is uncertain, the beginning [was] certain. Stocks are up a little bit, and yields are up a point or two and it is likely we will see somewhat upward pressure on [mortgage] rates.”
‘A Perfect Scenario’
Gumbinger said interest rates for refinancing over the next 30 days to three months would depend on the outcome of the attack on Iraq.
“[Interest rates] are [always] dependent on how well any military campaign is [moving ahead]. If things are going well, interest rates will rise. If things are not going well, we could revisit new lows or set new lows as investors look to protect their cash,” said Gumbinger.
“The outcome is uncertain for now. How it plays out over the next 30 days to six months … we don’t know.”
But Gumbinger said consumers are getting spoiled with the low rates and eventually, rates will rise; those who have waited to refinance for the hope of a lower interest rate will have missed out.
“The worst-case scenario is that [mortgage rates] will be at 6.5 percent at the end of the year, and that will kill off refinancing. People are jaded by under-6 percent interest rates and believe the longer they wait, the better they are – they feel a more favorable opportunity will come,” said Gumbinger.
Low mortgage rates drove home sales to record levels last year, but Gumbinger said the housing market is not like retail sales. At the end of the day, he said, lenders and brokers are “not discounting prices to get the inventory off the floor.”
According to Gumbinger, however, there are some positive aspects of the foreseeable interest-rate hike.
“There is a flip side to the coin. The pressure of home sales, fueled by cheap and easy mortgage money, is likely to [increase] along with the rise of interest rates, although not as favorably,” said Gumbinger. “It is reasonable to expect some slowdown in home sales and that would [withdraw] the inflationary pressures of housing prices.”
Tomaselli said there are a handful of consumers who are still hopeful for a better rate, but most consumers have refinanced in an effort to increase liquid assets.
“Many clients are refinancing multiple times and a lot of people are using their home like a credit card by taking equity out through refinancing to pay off other debts or, more so, they have decided to take cash out to renovate,” Tomaselli said.
While the current refi boom has lasted longer than industry insiders had predicted, many are still uncertain about the outcome for the year ahead.
“All along, we never expected rates to continue this way. In the mortgage industry, this is a perfect scenario,” said Katzman. “Who knows what the impact of [the] war will have on the economy. We might have another three to six months of relatively low rates but we are expecting that rates will not continue and they will either level off, or drop a bit, until there are signs that the economy is starting to strengthen. Certainly, we can be wrong.”
According to Gumbinger, the refi boom has seen its peak.
“We believe interest rates will be rising as the year progresses through 2003,” said Gumbinger. “We might not see much movement until summer but we will see rates somewhat higher as the year progresses. Things are growing and we are predicting a reasonable optimistic outlook for the economy.”
But war-related concerns continue to cloud optimistic forecasts for the mortgage industry.
“It’ll be interesting to see what happens with the market in general,” said Tomaselli. “When we saw [the terrorist attacks of Sept. 11, 2001] happen, I thought that would slam the brakes on the market and, if anything, that accelerated it. I couldn’t begin to predict the industry with the war in Iraq.”
Gumbinger said there are many possible outcomes to the continuous refinancing boom, and most of them hinge on the outcome of the war with Iraq.
“This is a hard time to forecast because no one really knows what is going on,” said Gumbinger. “There are some plausible scenarios but rates probably won’t change appreciably until we see what is going on in Iraq. As soon as we’ve got a clear picture of what happens in Iraq, we can get a better grasp on the economy and issues that face us.”
While the outcome of the war with Iraq is unpredictable, the end of the refi boom is inevitable.
Katzman said consumers and mortgage industry professionals should prepare now because “when the refi boom is over, it will be over rather dramatically.”
Melanie Nayer may be reached at mnayer@thewarrengroup.com.
