Mortgage rates near historic lows have sparked a refinancing boom that has U.S. lenders struggling to handle the surge.
“There’s just so much volume,” said Kristin Wilson, a senior loan officer in Bloomington, Minnesota, for Fairway Independent Mortgage Corp., who has seen clients seeking lower rates climb to about half of her business from 20 percent a month ago. “We can’t just ramp up by hiring inexperienced people because they don’t know what they’re doing.”
The lending logjam extends to the nation’s biggest banks, which fired thousands of mortgage workers after interest rates rose in November through February, chilling refinancing demand. Now, the time needed to close a loan has as much as doubled to 60 days, according to Wilson and other bankers, and lenders are holding some mortgage rates higher than they could be to slow the torrent of customers, data show.
Refinancing applications are up 83 percent from this year’s low in February, according to an index compiled by the Mortgage Bankers Association, a Washington-based trade group. After topping 5 percent that month, the average rate on 30-year fixed loans fell two weeks ago to 4.15 percent, the lowest in surveys dating back to 1971 by Freddie Mac, the second-largest U.S. mortgage-finance company.
Compounding the delays are stricter underwriting and disclosure requirements implemented in the past few years, which leave no room for shortcuts, said Stew Larsen, head of the mortgage unit at San Francisco-based Bank of the West. Wells Fargo & Co., the largest U.S. home lender, is no longer hiring temporary staff and outsourcing firms when applications jump because of separate rule changes, according to Franklin Codel, head of national consumer lending at its mortgage unit.
Obstacle for Obama
“The industry has come a long way in terms of automation, but it’s still a people-driven industry,” Larsen said. “Mortgage insurers, appraisers and title companies, all those surrounding industries, they downsized as well.”
Lenders’ capacity to handle loan applications could be an obstacle for the Obama administration, which is weighing options for spurring a housing recovery, including steps to promote refinancing for underwater borrowers, or those who owe more than their property is worth. Almost 27 percent of single-family homeowners with mortgages have negative equity, according to Zillow Inc., a Seattle-based real estate data provider.
Mortgage Bonds Underperform
Refinancing can provide a boost to the economy by reducing monthly mortgage payments and putting more money in the hands of consumers. Banks can profit from making new loans at lower rates because the existing, more expensive mortgages are mostly held by investors in the form of bonds or by other lenders. The refinancing bank collects fees and other revenue.
The $5.3 trillion of mortgage securities with government-backed guarantees underperformed U.S. Treasuries last month by the most since 2008 on speculation that the government will ease refinancing rules. That could speed up repayment of the mortgage bonds and deprive investors of their higher yields.
Refinancing is a cyclical business tied to yields on Treasuries, and lenders sometimes don’t let their rates fall as low as possible to avoid being overwhelmed. Today’s mortgage rates could be lower, based on their recent relationship with yields demanded by investors buying mortgage-backed bonds.
The difference between the average rate on a 30-year fixed loan and Fannie Mae-guaranteed bonds widened last month to more than 100 basis points, or 1 percentage point, from an average of 60 basis points in the first half, according to data compiled by Bloomberg and Bankrate.com, a North Palm Beach, Florida-based financial-information provider. The gap, which never exceeded 75 basis points in the decade through 2007, shows that banks have increased their margins on average.
“With the consolidation of the mortgage-lending industry during the housing bust, there is a lack of capacity to meet a surge in refinancing,” Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, said in an e-mail. “Mortgage lenders have been slow to lower primary lending rates, which is likely due in part to their lack of capacity.”
When the books close at Fairway Independent Mortgage, Wilson’s employer, August may turn out to have been the second-busiest month in the company’s 15-year history, said Dan Cutaia, president of capital markets and risk management. The Sun Prairie, Wisconsin-based lender operates in 47 states and originated $4 billion of mortgages last year.
The test for banks will come in a couple months when newly approved borrowers expected to close, Cutaia said.
“We took in all this volume,” he said. “Now we have to do the best we can to have them processed, underwritten and closed.”
A smooth process requires underwriters, title insurance companies and appraisers to work quickly. The turnaround time for an appraisal, usually five business days, now is as long as 14 days in some parts of the country and probably will get longer because of new valuation requirements that will take some getting used to, according to Betty Graham, senior vice president of operations at Frisco Lender Services LLC, a unit of Fairway in Fort Wayne, Indiana.
New York Condos
In New York City, managing agents at condominiums and cooperative apartment buildings are swamped by requests for information from appraisers, said Norman Calvo, president and chief executive officer of Universal Mortgage Inc. in Brooklyn.
Calvo said his refinancing work has tripled since June, and borrowers who took on new loans a few months ago are applying to lower their rates again.
“It was one of our greatest months in more than 10 years, and it keeps on coming,” Calvo said.
Mortgage companies, which kept their loan-servicing operations lean during the housing boom, similarly were unequipped to handle the avalanche of defaults in the four years since the crash, resulting in paperwork snafus that continue to delay foreclosures and the recovery of the property market.
One proposal to expand the administration’s refinancing program for homeowners hit by the decline in property values would remove the cap on negative equity and exempt participants from risk-based fees charged by Fannie Mae and Freddie Mac. The mortgage-finance companies would also be required to inform all of their borrowers that the program is available, according to legislation filed by U.S. Senators Barbara Boxer, a California Democrat, and Johnny Isakson, a Georgia Republican.
Bob Walters, chief economist for Detroit-based Quicken Loans Inc., the largest online lender, said mortgage companies in the past depended on independent brokers to field borrower applications. The number of brokers dwindled after the housing bubble burst, he said.
“All of a sudden now we see a smaller universe of people handling the volume,” Walters said. “So what’s happening is when the volume hits, people hit capacity much quicker.”
Bank of America Corp. said Aug. 31 that it plans to sell or shut its correspondent-mortgage unit, which buys loans from smaller companies, a move that may exacerbate the crunch. Earlier this year, the Charlotte, North Carolina-based bank joined lenders across the industry in cutting staff added during a refinancing boom that crested in October.
In April, Wells Fargo, based in San Francisco, said it aimed to cut 4,500 employees from its mortgage unit, and Bank of America, its biggest competitor, said it trimmed its mortgage workforce by 1,500 employees and 2,000 contractors.
Wells Fargo’s Codel said the bank shut a handful of refinancing offices it had opened around the country that employed as many as 300 back-office workers each. The company is now reaching out to staff it let go and holding job fairs in an effort to add employees within a few weeks.
Mortgage-industry jobs fell to 239,100 on June 30 from 259,700 at year-end and more than 500,000 in 2003, according to Department of Labor data cited by Bank of America bond analysts and MortgageDaily.com, an industry-news website. MortgageDaily.com says the data are skewed by how individuals at some firms are counted, and puts net layoffs this year at more than 2,200, including those in lending and servicing divisions.
While Bank of the West held its mortgage staff steady earlier this year, it’s also being challenged by higher volumes, telling consumers a refinancing is likely to take 45 days, said Larsen, whose 137-year-old bank is owned by France’s BNP Paribas SA. Its customers can usually close within 30 days.
Keeping rates higher than the bank might otherwise to ward off business is “certainly in the playbook, but that’s not something we’ve had to go with yet,” Larsen said. “Some lenders do that more than others.”
Wells Fargo has sometimes offered less competitive rates because “we look at it all around the country and there are times when we do that to control volume,” Codel said. The bank has stopped offering the option to lock in rates for 30 days, as a way to curb consumer expectations that loans will close that quickly. Longer rate locks, which it continues to provide, can cut down on applications because they carry higher rates, he said.
Both Wells Fargo and Bank of the West said they often extend rate locks if consumers can’t close on time because of processing delays.
Bank of America can cope with refinancing demand with its current staffing, partly by moving work among different departments, Terry Francisco, a Calabasas, California-based spokesman for the lender, said in an e-mail. Some local offices aren’t as inundated as call centers working with online applicants, he said.
“We seek to price competitively but not at a level that will cause volumes to spike and disrupt our ability to close loans within a customer’s requested closing date,” Francisco said.
Lenders’ decisions on pricing depend on several issues, including their ability to handle volume and their own costs to borrow money, said Doug Lebda, founder and chief executive officer of Charlotte, North Carolina-based Tree.com Inc., which runs the LendingTree mortgage website.
“In a market that is very volatile, there are wide varieties of pricing,” Lebda said. “Now it’s more important than ever to comparison shop.”