As housing weighs on a fragile economy, PNC Mortgage President and CEO Saiyid Naqvi is sounding a note of optimism, predicting the U.S. downgrade will indirectly rekindle refinancings.
Demand is already back. The only question is whether the industry can fulfill all the requests, given the constraints of lower appraisals, tightened credit guidelines and shrunken staffs.
Refi applications jumped 30.4% last week, according to the Mortgage Bankers Association. Such applications have surged 63% in the past month, the trade group reported Wednesday.
With the average 30-year fixed rate below 4.5% again, many homeowners who refinanced in the past two years can benefit by doing so again. They can thank Standard & Poor's for prolonging that opportunity: the rating company's downgrade of U.S. debt Friday egged on a flight to quality in, well, U.S. debt.
Even before S&P stripped the government of triple-A status, falling Treasury yields had caused mortgage rates, which are pegged to those yields, to sink last week to levels near their all-time low of 4.21% reached in October 2010.
After the downgrade, "we saw a big rally in Treasuries, and mortgage rates have come down near historic lows," says Naqvi, who's been around long enough to have worked for Sears when it owned a mortgage company. "With that, we're seeing a surge in refinance volume."
At PNC Mortgage, a top-20 home lender owned by the $263 billion-asset PNC Financial Services Group Inc. in Pittsburgh, daily refi application volume has doubled from last month, Naqvi says. Many homeowners with adjustable rate loans that are expected to reset in a year are trying to lock in rates now, though it's unclear how many "won't qualify," he says, because they have too little equity in their homes or bad credit.
"The requirements are much more stringent," he says. "People who took out mortgages in the last few years may not have had the same level of documentation. Today, they have to explain their sources of fund, their deposits, that they never had to explain before and they find it intrusive."
Jay Brinkmann, the MBA's chief economist, says pull-through rates — the ratio of loans that actually get funded to application volume — are still about 50%. "We have seen somewhat of a decline in pull-through rates in spring and summer as people who wanted to refi had tried before and been turned down," he says.
Many lenders are operating at capacity, having cut staff after a slow spring and summer home-selling season.
Scott Buchta, a managing director at Sandler O'Neill & Partners, LP, says some lenders are keeping rates higher than they otherwise would so their don't get inundated with more applications than they can handle.
"Rather than build staff quickly, they'll ration through price," concurs Brinkmann. "Companies have been shedding capacity … you can't carry the staff and then get hit with a refi wave."
Still, Buchta expects a surge in refis in the next two months, particularly for jumbo loans. The maximum size for mortgages backed by Fannie Mae and Freddie Mac is set to drop on Oct. 1 to $625,500 from $729,750 unless Congress extends current limits.
Naqvi is less upbeat about the "shadow" housing inventory (stockpiles of foreclosed properties not officially for sale) and high unemployment — both of which argue against home prices going up anytime soon.
Most prospective homebuyers are reluctant to buy because they are "anxious about their employment situation," he says. In addition, homeowners are struggling to sell their homes when as much as 40% of the official inventory is distressed, a situation that causes appraised values to come in below expectations.
In the first quarter, 24% of would-be real estate deals where the buyer and seller had agreed on a price ended up with a lower appraisal, Naqvi says. Of those, 11% of potential sales fell through and in another 13% the parties renegotiated the price to a lower amount because of the appraisal.
"These properties that are foreclosed and short sales are used as comparables and that's the reason we see this continued downward pressure on home prices," Naqvi says. "Unfortunately, there's no easy way out of here until all of that inventory of homes clears the market."
