During the fall and winter home mortgage lenders were so swamped with applications that they did not cut their prices to the same degree interest rates were falling, because they could not handle more volume.
They have now worked through that backlog, just in time for another spurt of refinancings that could be even bigger than those of late last year.
Lenders had been asking, "'How much more can I take?' " said Steven DiMarco, the director of mortgage sales for MAF Bancorp Inc.'s MidAmerica Bank in Chicago. "But now, after January and February, a lot of the pipelines have been closed, and they are going back to more traditional pricing models.
"The lower rates are now being fully reflected in the marketplace," Mr. DiMarco said.
The latest data show historically low rates on new mortgages and record highs for application volume and industry employment. This is good news for lenders and consumers, but it may also be the two-year-old refi boom's last hurrah. Experts expect a downturn to come in the next 12 months, which would lead to a price war - and the resulting margin compression and layoffs - as nasty as that of any previous slump.
The Mortgage Bankers Association reported Wednesday that during the week that ended Friday, the average rate for 30-year fixed-rate loans fell 15 basis points from the week before, to 5.42%; the rate 15-year fixed loans dropped 18 basis points, to 4.72%. The rate for one-year adjustable-rate mortgages tumbled 20 basis points, to 3.29%. All three rates represented historic lows.
As a result, the trade group's indexes of application volume soared to record highs. The composite index - which measures the combined volume of applications for purchase loans and refinancings - jumped 27% from the previous week, to 1,603.1. The refi component index surged 35%, to 8,920.9.
The latest wave of applications "is rate driven, no question about it," said James W. Kunzler, the president of Trustcorp Mortgage Co., a South Bend, Ind., unit of 1st Source Corp. "Borrowers are very much attuned to the current interest rate environment. Our new [applications] are running at about 70% to 75% refinance. This could very well be the fourth refinance cycle in a two-year period."
The New York investment firm Keefe, Bruyette & Woods Inc. wrote in a research note released Wednesday that rates are so low, loans refinanced in mid-2002 are "in the money" to be refinanced again.
Mr. DiMarco at MidAmerica said the Chicago area has enjoyed a boom in purchase activity in the past few weeks as buyers have raced to take advantage of especially low adjustable rates. "Because of the rise in purchase volume, we're seeing our demand for adjustable rates running at 45%."
It makes sense, because many buyers there are transferred employees who know they will not be living in their homes "for the rest of their lives" and expect to sell before the mortgage's teaser period expires, Mr. DiMarco said.
This suits MidAmerica just fine, he said, because it helps the bank increase the assets on its balance sheet.
Some companies had a breather early this year.
Countrywide Financial Corp., the No. 3 originator, reported Wednesday that its February loan volume dropped 8.3%, to $30.9 billion. A spokesman for the Calabasas, Calif., company attributed the decline to heavy snowfall in the East and to the fact that there were only 19 working days last month, versus 21 in January.
Mr. DiMarco said that, even though MidAmerica has had record activity in the past few weeks, life after the boom is never far from his mind.
"Margins, in time, are going to get stepped on like you wouldn't believe. This hangover is going to be tough," he said. "You are going to see some interesting things happening from a competitive standpoint" - meaning that when rates rise, lenders will start underpricing loans to win business, a move that will squeeze margins.
The pessimism appears to be widespread.
The research firm Mortech LLC on Monday released the results of a survey in which 333 senior mortgage managers were interviewed between November 2002 and February 2003. The survey found that large mortgage lenders are growing increasingly downcast about the business and expect serious declines in volume and profits this year.
Despite the gloom, the Chester, Conn., firm said that lenders continue to invest in more production capacity.
Jeff Lebowitz, the founder and principal of Mortech, said the industry's 70 largest lenders believe their revenues and profits will drop in the next year. That expectation has led them to prepare to fight for a larger share of a shrinking pie, he said.
"They are saying 'We are going to expand our production and build scale to accommodate that production,' obviously in an attempt to offset their belief that revenues and profits are liable to decline," Mr. Lebowitz said. "They are trying to neutralize that sentiment."
Both Fannie Mae and the MBA have forecast a 25% decline in originations this year, and the industry is facing a "recipe for price wars," he said.
"We've been doing this survey since 1988, and I can't remember such a convergence of conditions leading to potential margin disaster," he said. "It is bad as I can remember it."
According to the Bureau of Labor Statistics, mortgage employment has risen steadily for the past 10 months, to a record 422,000 in February.
Mr. DiMarco said that sooner or later, lenders have to consider downsizing.
But Mr. Kunzler at Trustcorp said lenders always have to deal with capacity - regardless of the business environment.
He expressed hope that the purchase market will remain strong but said he did not expect homebuyer-related loans to completely offset the drop in refis. "You always have to think up plans for life after the party. That's nothing new."
