The End of the Refinance Market in America
A rise in interest rates
affects more than just the homeowner hoping to refinance a mortgage. In a recent conversation with an account executive of lending institution I do business with for my mortgage firm, I was told that the bank had instituted layoffs in the wholesale lending division. The rise in interest rates had so effected the financial outlook of that business unit that the bank could not justify keeping the full staff. That bank was just one of many that I worked with in 2009-2010 that has cut staff or consolidated its operations due to reduced earnings from this sector of the business. Bank of American Corp. (NYSE: BAC), closed their wholesale lending division in November. Wells Fargo & Company (NYSE: WFC) remains the only bank of the big four that continues to operate a wholesale division. By their actions, it’s apparent that the banks are forecasting a continued rise in interest rates and the consequential reduction in the home refinancing market. The Mortgage Bankers Association predicts loan refinancing will amount to about $400 billion in 2011 which is 40% of the total mortgage market. For comparison, in 2003, a peak year for home loans, loan refinancing accounted for $2.5 trillion and 60% of the total mortgage market. Earnings of the major lenders, Bank of American Corp. (NYSE: BAC), Wells Fargo & Company (NYSE: WFC), CitiGroup, Inc. (NYSE: C) and JPMorgan Chase & Co. (NYSE: JPM [FREE Stock Trend Analysis]) will continue to be affected by this downturn.
It is clear that those who were unable to refinance at the low rates of 2010, certainly won’t qualify as rates creep up. In addition, those who did qualify have refinanced at historically low rates and won’t be in the market again. With rates slowly creeping up, banks will have to rely on new home purchases for business.
I predict 2010 will have had the lowest mortgage interest rates in this century. With the increase in the national debt and a rise in inflation, the 30 year bull market in interest rates will come to an end. While I do not foresee the return of the 16-18% interest rates of the early 1980s, (see 30-Year FRM Rates 1971 – 2010) I do expect rates to reach the double digits (7-11%) in four to six years and staying in that range for 10- 15 years. There will be intermittent opportunities for borrowers to refinance during short term declines in rates but timing the market will be critical as the prevailing trend will be upward.
Logan Mohtashami is a senior loan officer at his family owned mortgage company, AMC Lending Group, which has been providing mortgage services for California residents since 1988.
I’m afraid I have to agree with your assessment on both the refinance market and the change in wholesale lenders.
I would like to hear your thoughts on the purchase market for California in 2011.
On the lender front, mid-size wholesale companies like Bay Equity are stepping into the shoes of some of the previous powerhouses. Bay Equity was built on the back of hands-on wholesale mortgage experience through multiple business cycles. I think they stand a good chance of growing in this one.
Thanks for your blogs, I get a lot of insight from them.
Hello Kelly
The purchase market in 2011 for California will be very interesting. The state home buyers (excluding cash buyers for investments) will have higher interest rates and no tax credit to look forward to this year. I believe the tax credit took some future buyers away from this year and brought them to the market last year. So, I do see less demand for all loans types this year compared to last year. If rates take a leap downward that could be a positive for the California market. However, I still believe that there aren’t enough qualified home buyers, nor enough with the e confidence to go into the market. If the job market suddenly got much better, that would generate more confidence in buyers, despite the rise in interest rates. That woud make me a bit more positive about the health of the purchase market in California. But, in reality, I just can’t see the market doing better than last year. Last year you had super low rates, the tax credit and, at least for the first half of 2010, a false impression that the market had hit rock bottom and was beginning to turn around.