Despite the Federal Reserve Board's latest attempts to stimulate the housing market, home lenders are keeping rates artificially high to control the volume of refinancing applications.
The industry is struggling with capacity constraints, including the disappearance of warehouse lines and lower staffing levels as a result of layoffs last year and in 2007. Many lenders are holding off on hiring out of concern that the current refi wave, which began in December and crested in January, may not last much longer.
Another reason for the artificially high rates, some industry insiders say, is that prepayments from refis could reduce profits on the servicing side. Even if a servicer retained a customer, there would be a cost for originating a new loan.
"The true market rate should be 4.5% with no points, but today rates are up around 5%," said Brian Koss, managing partner at Mortgage Network Inc., a privately held lender in Danvers, Mass.
Koss is a former regional manager for Countrywide Financial Corp., the top originator and servicer of home loans, which Bank of America Corp. acquired last year. He said the big servicers have a disincentive to offer attractive refi rates.
"Servicers know at exactly what pricing threshold there is a propensity for loans to prepay," he said. "So why would they take a hit on servicing and then go through the process of paying out to put a new loan on their books?"
According to National Mortgage News, the top five servicers now control almost 67% of the housing debt in the United States. Koss said that if 25% of their customers were to refinance, they would "lose money having to buy more servicing to replenish what got paid off."
Normally, customer retention is a big concern for servicers in an environment of falling rates. But the risk of losing customers is not as great when competitors are grappling with their own limitations.
"If we had the capacity, you could steal this market and take yourself to $500 million a month in volume," said Matthew Pineda, the president of Castle & Cooke Mortgage LLC in Salt Lake City. "Why is Wells not afraid that B of A will roll out a rate of 4.5%? There are eight guys doing loans. Until one gives it up, they're all playing the game. The reason you don't give it up today is they'd have to work twice as hard for half the profit. Why would they give it up?"
Barbara Desoer, the president of B of A's mortgage, home equity and insurance services, said in an e-mailed response to questions that the Charlotte company provides "a fair price to the customer while balancing our capacity to deliver a positive customer experience."
In the past year B of A has added the equivalent of 3,000 sales and fulfillment positions, said Desoer, who is overseeing the integration of Countrywide from its former headquarters in Calabasas, Calif. (On the servicing side, B of A has doubled the "home retention" staff, which tries to prevent foreclosures on troubled loans, to 6,000.)
"We anticipate further rate improvements as we and other lenders balance capacity with opportunities to gain share and generate profitable revenue growth," she said.
Calls to JPMorgan Chase & Co. and Wells Fargo & Co.'s home mortgage unit were not returned.
Pineda said many borrowers do not qualify for the lowest rates — typically 4.625% — because of the fees charged by the government-sponsored enterprises Fannie Mae and Freddie Mac for riskier loan types.
"Rates should be at four and a quarter, but nobody is rolling out that rate, because if they did, they'd be getting more volume than they could handle," he said. "There are fewer lenders now, so the business is going to bottleneck through those that are left standing."
The cost of warehouse lines — on which nonbank lenders like Castle & Cooke rely for funding — has increased, he said. "To renegotiate a credit facility will cost you $1.2 million for a $60 million facility, whereas last year it would have been $500,000."
The Fed said last week that it would purchase $300 billion of longer-term Treasury securities and increase purchases of agency mortgage-backed securities by up to $750 billion this year, to up to $1.25 trillion.
The central bank said its purchases were intended "to reduce the interest rates that the GSEs require on mortgages that they purchase or securitize, thereby lowering the rate at which lenders, including community banks, can fund new mortgages."
Scott Anderson, a senior economist at Wells, said another reason bankers would be reluctant to offer low-rate refis is that it helps their balance sheets to have higher-rate loans.
"The banks are feeling a lot of credit losses and defaults, and they have a lot of repairing of their balance sheets to do," Anderson said. "So they want to keep those net interest margins higher to weather this period if they want to survive to originate another day."
To increase pullthrough rates — the percentage of applications that eventually get funded — some lenders have rolled out "priority underwriting" programs, in which borrowers with FICO scores higher than 700 or 720 are served first.
Lenders say the cost of due diligence and underwriting has gone up dramatically compared with the heady days of 2003 to 2007, when lenders offered refis without requiring new appraisals.
Koss said he had "stacks and stacks" of refi applications from borrowers who could refinance their loans but "are morally opposed" to paying discount points.
Nevertheless, he said, 20% of his customers are agreeing to pay up to two points to lock in the lowest rates, compared with a mere 5% of borrowers who did so in December.
"Shame on our industry for getting borrowers addicted to paying nothing, because it has come back to bite us," Koss said.
