Refinancing could become a dirty word to companies with large servicing portfolios.
When the yield on the 30-year Treasury bond hit its lowest point in 20 years on Tuesday, many borrowers began to seriously consider applying for a mortgage loan at a lower rate.
And industry observers said that if rates remain this low, companies with huge servicing portfolios may not be able to originate enough new loans to replace those that run off.
"For big servicers, this could be a tough time," said Larry E. Swedroe, formerly of Prudential Home Mortgage and now a principal at Buckingham Asset Management, St. Louis. "This will test whether they are hedging effectively."
Many of the large servicers maintain that their hedging techniques-the purchase of financial instruments designed to rise in value in a low-rate environment-will preserve portfolio value.
Still, a deluge of refinancings could cause other problems.
"The big concern if there is an avalanche of refinances is going to be more operational," said William Glasgow Jr., executive vice president for servicing at HomeSide Inc. It has a servicing portfolio of nearly $100 billion.
Mr. Glasgow said mortgage companies would have to add employees to handle the increased level of prepayments.
But most large mortgage servicers don't seem to be terribly worried about runoff because these companies generally have sizable production networks as well.
Thomas M. Garvey, executive vice president of retail production at Chase Manhattan Mortgage, Edison, N.J., said if rates remain at current levels for a prolonged period, it is possible for companies to have about 20% portfolio runoff.
For Chase, that would amount to about $34 billion of its $170 billion portfolio.
But the company originated nearly $40 billion of loans in 1997, Mr. Garvey said, and the company expects to match this in 1998.
Yearend figures for Norwest Mortgage, the nation's largest mortgage originator and servicer, were not available, but a spokesman said the company was on track to originate nearly $55 billion for 1997.
Norwest has a portfolio exceeding $200 billion, so if this year's origination total matches last year's, it would be $15 billion greater than a 20% runoff.
Many large servicers send out monthly statements and other direct mailings to encourage customers to call them if they want to talk about refinancing.
But these companies don't appear to be going out of their way to get customers to refinance.
"We do more than just dialing for dollars," said Peter J. Wissinger, managing director of consumer lending and servicing for Norwest Mortgage. Mr. Wissinger said the Des Moines lender does call some borrowers who are candidates to refinance. But for the most part, Norwest's main priority is the purchase market.
Because the average note rate for its servicing portfolio is 7.75%, there aren't so many customers who have a compelling need to refinance, Mr. Wissinger said.
According to the latest weekly survey by Freddie Mac, the average rate for a 30-year fixed-rate mortgage was 6.94%.
Other servicers are offering discounted closing fees to retain borrowers. Terry Rowland, executive vice president of loan production at Frederick, Md.-based First Nationwide, said it makes sense for borrowers to refinance with their loan servicer because that company already has all the relevant financial information and can probably offer the lowest cost.
In some cases, especially for the most creditworthy borrowers, Mr. Rowland said, First Nationwide, which has a portfolio topping $60 billion, offers to renegotiate the rate on a loan rather than force the borrower to submit a refinancing application.