A Frenzied Race to Refinance

Thomas Williams fears he just got left behind. The Washington (D.C.) real estate agent had refinanced his $600,000 mortgage a year ago at an annual interest rate of 5.5% for the first five years, and he had hoped to do even better this summer. His dream: locking into a comfy fixed rate for 30 years. But since mid-June, rates on a conventional 30-year mortgage have jumped by almost a percentage point from a 45-year low of 5.21%. Today, the best he can get is 6.25%. "I'll float for a while and see what happens," he says.

Across the country, mortgage brokers and lenders are gearing up for what could be the last burst of borrowing as consumers race to lock in before rates go any higher. Corporate borrowers are dashing to their banks, too -- especially weaker companies with below-investment-grade credit, who are scrambling to take advantage of lower spreads in the junk bond market.

For executives and homeowners alike, the sentiment is the same. "People are saying, 'I'd better get this done before I miss the boat,"' says Timothy M. Bartosh, president of Dallas-based CTX Mortgage Co., a division of homebuilder Centex (CTX ) Corp.

The surge in mortgage applications is stretching many lenders. New loan applications in the week ended July 18 were up 7% from a month earlier and 26% year over year, according to the Mortgage Bankers Assn. The latest two weeks were busier than any other in 2003 except the week ended May 30. At CTX, for example, some employees are logging 16-hour days and working six days a week to keep up with the paperwork -- and that's since the company hired 20% more loan officers over the past two years. "We're working frantically," says Jan Weiland, a loan officer at Woodfield Planning Corp. in suburban Chicago.

A similar frenzy has infected corporate borrowers. Many companies, of course, got busy early this year, refinancing old obligations and taking on new loans. Now weaker companies are piling in. They can do so largely because the rate spread between investment-grade and junk debt has shrunk to 4.3 points, from 6, since the beginning of the year, thanks to investors chasing higher returns. Prompted in part by fears that those spreads could widen again, companies issued $71.2 billion in junk bonds in the second quarter, nearly triple the first quarter's $24.1 billion, according to Standard & Poor's.

Still, the urge to refinance or issue new debt is not nearly as pronounced as it has been when interest rates shot up before. Even after their recent surge, rates remain at historical lows. Some are even betting that they could decline again if the economy loses momentum, giving them another shot at refinancing or getting that first loan.

Others are keeping their fingers crossed. Take Paul Hletko, a patent attorney in Evanston, Ill. He is scheduled to close on a three-bedroom condo in mid-August. In exchange for paying no closing costs, he agreed to go with the prevailing rate on that date. When he first made the deal, the 30-year rate was 5.37%. Today, it's 6%. "I don't like it," Hletko says. "But what can you do?" At least he can take comfort in this: Even at 6.25%, he'd still be paying less than he would have a year ago.

By Michael Arndt in Chicago, with Stephanie Anderson Forest in Dallas

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