The dearth of home purchases has forced lenders to search every nook and cranny for mortgage volume, and some are looking in the last place you might expect: refinancings.
There is a glimmer of hope among these lenders that the rebound in home prices will finally prod those remaining underwater borrowers who have not yet refinanced to finally do so at any dip in interest rates.
Many underwater borrowers are "waking up" to the fact that they now have positive equity, says Brian Hale, the CEO of Stearns Lending in Santa Ana, Calif.
"It's not true that refis are dead, not by any stretch of the imagination," says Hale, a former head of production at MetLife Home Loans and Countrywide Financial. "We still see a very material demand for refinances. It's still there, it's profound, and it will drive a lot of the market. "
It may sound like wishful thinking, considering that refinance volumes have plummeted by more than half since last June. But there are few other options.
"It's a tooth-and-nail battle for business," says Matt Hackett, operations manager at EquityNow, a New York mortgage bank. "The purchase business isn't exactly knocking it out of the park."
Mortgage lenders are loath to give up on the handsome and easy profits generated in the last two years by the government's Home Affordable Refinance Program. The program allows borrowers with loan-to-value ratios above 80% including those severely underwater with no equity to refinance if their loans are guaranteed by Fannie Mae and Freddie Mac. The program has been extended until the end of 2015.
"There are these latent refinance customers who have been buried under the mud for five years and as home values come back, they are going to do something," Hale says.
In late March, the refinance share of mortgage activity fell to 54% of total applications, the lowest level since April 2010, according to the Mortgage Bankers Association. Though that is down from a 65.5% share in December, and 84% in late 2012, many lenders would still consider the current environment a refinance market because the market share is above 50%. A 70% purchase market and 30% refinance market is the norm, experts say.
"We're suffering from a relative memory lapse," says Mark Garland, the president of MountainView Servicing in Denver. "Anything above 40% is a refinance market and there are plenty of borrowers who have had appreciation and are looking to tap their equity because they need the money."
There are roughly 580,000 Harp-eligible borrowers who have not yet tapped the program, according to recent estimates by Goldman Sachs. These borrowers need to be motivated to refinance and many have been so inundated with solicitations from lenders that they don't believe the offers, a phenomenon lenders call "refi burnout."
"There are some people out there who are just not going to refinance," says Hackett.
But a bone-dry home purchase market has sent lenders scurrying to find every last refinance borrower, though they are up against higher rates and a ticking clock.
For some, rates would need to drop significantly further something unlikely to happen given Federal Reserve Chairwoman Janet Yellen's recent moves to spark a wave of unsolicited refi requests, lenders say. So far about three million borrowers, including 900,000 who had no equity, have refinanced under Harp.
The market is searching for "origination harmony," says David Zugheri, co-founder of Envoy Mortgage, a Houston mortgage bank.
"I would have to agree that refis are not completely dead, but they are wounded," he says. "They've been curtailed considerably. Equity is coming back, but you just don't want to be a one-trick pony right now as an originator. You can't just chase refinances, which is something you could do several years ago."
The refi drop has put the squeeze on mortgage bankers that are also struggling with falling gain on sale margins and higher expenses after expanding their retail networks by luring away loan officers with big bonuses last year.
"Smaller origination profits and less efficient origination processes have contributed to much-reduced refi activity," says Walt Schmidt, senior vice president and manager of mortgage strategies at FTN Financial Capital Markets in Chicago. "Refis may not be dead, but they are certainly in serious, if not critical condition in this environment."