For those with memories that date back to the early 1990s, a refinancing boom such as this year's inevitably raises worries of a post- refi meltdown.
The record-setting $1 trillion mortgage originations in 1993 gave way to a painful period of retrenchment, as the Federal Reserve Board raised interest rates by 300 basis points in 1994.
Mortgage originations - for refinancings and purchase transactions - dried up, falling almost 25%, from over $1 trillion to $769 billion in 1994. Suddenly mortgage banking was too big and too bloated.
"You went from boom to bust," analyst Jonathan Gray of Sanford Bernstein & Co. recalled recently. Mortgage banks "had far more people employed than business. That led to a price war that was vicious," Mr. Gray said.
Independent mortgage banks, publicly owned for just a few years, hats in hand, shopped for commercial bank buyers. By 1995, Countrywide Credit Industries was the only major public mortgage bank still on its own.
Servicing income, the traditional hedge for mortgage banks during periods of high mortgage rates, was also lean. Many large mortgage banks had seen their portfolios of servicing rights decimated by the refinance boom.
Is history destined to repeat itself this year, as refinancings trend down?
No, say analysts, among them Thomas O'Donnell of Salomon Smith Barney. Though servicing portfolios are larger now than in the early 1990s - several have crossed the $100 billion mark - mortgage banks have shown they can replenish the runoff of refinanced mortgages, Mr. O'Donnell said.
Moreover, lenders have learned from the 1993 debacle. They have increased their reliance on temporary workers, who can easily be laid off when originations shrink. More of the mortgage origination process is automated, which also cuts down on the use of staff, he said.
Norwest Mortgage, whose $206 billion servicing portfolio is the industry's largest, is using many tools to manage the refinance boom and the ebb that follows, according to Michael J. Heid, executive vice president of loan servicing at the Des Moines-based unit of Norwest Bancorp.
Norwest's first line of defense is trying to retain its existing servicing customers, Mr. Heid said. Through monthly mailers, the company reminds customers that if they wish to refinance, Norwest is the place to do it.
The danger of such communications is that it plants the notion in customers' minds that refinancing would be a good idea.
Mr. Heid acknowledged Norwest is walking a tightrope. "Our motive is not to encourage people, but our motive is that if they've decided to refinance or to move to a new home, that they think of us first," he said.
The monthly mailers list a toll-free number where mortgage customers can call for information on refinancing an existing mortgage or financing a home purchase.
Mr. Heid said Norwest's servicing staff are also focused on how to hang on to each customer. When customers call the servicing centers with questions about whether refinancing would work for them, "we'll spend time with that customer, and if it makes sense, have one of our retail offices or centralized office handle that (loan), he said.
The company has also shown that it can make enough loans to replace prepaying mortgages. It originated $20.9 billion of mortgages in the first quarter, more than enough to replace the runoff of $14 billion during that period.
Norwest's portfolio of servicing rights grew from $206 billion on Dec. 31 to $212 billion on March 31.
To avoid overstaffing during the refinancing boom, Norwest has moved some of its servicing staff to the originations side of the business, Mr. Heid said.
The final line of defense: hedges whose value increases as falling interest rates and accelerating prepayments decrease the value of Norwest's servicing rights.
"As far as Norwest Mortgage is concerned, we feel we are uniquely positioned given our large servicing presence and our large retail production presence," said Mr. Heid.
One big reason the mortgage industry will likely fare better as this refinance ebbs than it did in 1994, is that home sales are expected to remain strong throughout the year. As refinancings ebb, mortgages to finance home purchases are expected to pick up the slack.
The latest Mortgage Bankers Association index shows that for the week ended April 24 refinances were 42% of all mortgage applications, unchanged from the week before.
Refinancings have fallen as a share of mortgage applications from 60% in January to 55% in February and 48% in March. A total of three million homeowners have applied to refinance their mortgages so far this year.
Though 30-year mortgage rates are expected to rise - from about 7% in January to more like 8% in the year's second half, "demand for mortgage credit to fund purchases will continue to be very very substantial," Mr. Gray of Sanford Bernstein & Co. said.
"It won't be a U-turn at 100 miles per hour" this time around, Mr. Gray said.
Indeed, the pace of home resales has been record-setting this year. March was the second record-setting month in a row, with the seasonally adjusted annualized pace of home resales hitting 4.89 million units.
Mortgage applications so far this year suggest home resales will continue to be strong at least through the second quarter, and the National Association of Realtors predicts that a record 4.35 million existing homes will be sold this year.
