Mortgage Purchase Market Looking Vulnerable to Refi Drop-Off

Mortgage originators enjoyed a decent second quarter, with loan production rising a respectable 7% from the first quarter, but they are worried about what will happen when refinancings begin to wane.

According to survey figures compiled by National Mortgage News and the Quarterly Data Report, mortgage bankers funded $357 billion of one-to-four-family mortgages in the second quarter. Refis accounted for about 70% of all new loans.

But over the past several weeks refi applications have risen to 80% of new production, a sign that consumers, fearful of losing their jobs, will not commit to buying a home or venture into the "move-up" market.

"I think the purchase market will continue to be flat through 2010 and into next year," said Michael Fratantoni, vice president of research and economics for the Mortgage Bankers Association.

Lenders originated $680 billion of home mortgages in the first half, according to National Mortgage News' research.

The MBA is projecting loan production of $400 billion for the third quarter and a sharp drop to $280 billion in the fourth quarter.

The origination market was bolstered by federal tax credits for homebuyers, but the benefit expired this spring.

Some contracts entered into before the expiration date will result in loan closings that occur in the current quarter.

For now, refinancings are the only game in town. Some lenders are even hiring additional staff — such as Foundation Financial Group of Atlanta and PNC Financial Services Group Inc.'s PNC Mortgage — but there is a fear that when refis run their course the industry could face an ugly contraction unless homebuying begins to increase from its current rock-bottom levels.

Freddie Mac is more optimistic, predicting that loan production will total $1.4 billion this year with next year being about the same.

Fratantoni said that the Mortgage Bankers Association is in the process of updating its outlook and that it will announce a new forecast at its annual convention in Atlanta in October. He said he fears that "at some point we will turn the corner on rates and refis will disappear."

Lenders interviewed by National Mortgage News over the past few weeks were particularly concerned about the jumbo market, where refis are even more prevalent.

There have been scattered reports that very few jumbo loans are being sold into the secondary market and that the nation's megabanks and regionals are funding these nonconforming loans, keeping them in portfolio.

If the trend continues it will hurt nondepository conduits that are hoping to revive the private-label securities market in the quarters ahead.

However, there may be one ray of hope for the nonconventional market: a new trade group that represents "hard money" lenders is seeing renewed interest in the business.

Wallace Groves, executive director of the American Association of Private Lenders (formerly the National Hard Money Association), said the year-old group has 80 members.

"Most are lenders, not service providers," Groves said, adding that interest in the sector is increasing.

He said his members are advocating "quality lending" and want to avoid the subprime lending standards of the past decade.

"Many of those firms are gone and the industry is better off for it," he said.

One veteran mortgage banker who is now in the hard-money space is Dan Perl of Citadel Loan Servicing in Southern California.

Citadel is a specialty servicer and investor in troubled mortgages. Perl, who has managed both depositories and nonprime lenders during his four-decade career, said he would like to expand the small hard-money business.

His firm currently requires borrowers to have a large amount of equity, and it charges 11% interest or more.

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