Handling the hot mortgage refinance boom, while preparing for the cool-off
by Robert O'Connor
While the mortgage refinance boom has undoubtedly been good for the lending industry overall, it has proved to be a bonanza for community banks. Independent, local banks are particularly well suited to the refinance market. They enjoy high recognition. And they have financially oriented customers that mortgage brokers and competing lenders would envy.
Scott Hall, western business development officer at ICBA Mortgage, ICBA’s secondary market access provider for community banks, says that many refinance customers automatically look first to their community banks. “We’ve always found with the community banks,” he says, “that the refi percentage has been higher than in other segments of the industry.”
Michael Hindman, president of ICBA Mortgage, concurs and adds that the current refinance boom fueled by sustained 40-year-low interest rates has lasted longer than most. “You’re seeing a ton of business,” he says. “You’re seeing a lot of homes being sold and a lot of homes being refinanced.”
Mortgage interest rates, Hindman says, have not risen above 6 percent since the summer of 2002. He cites the combined effect of a relatively weak economy and continued consumer confidence. For him, consumer confidence is the most important economic indicator because it so closely tracks mortgage origination trends.
The current mortgage refinance market has been “phenomenal,” agrees Richard Belling, vice president of mortgages at Grafton State Bank in Grafton, Wis. Normally, Grafton State Bank would expect refinance business to make up about 20 percent of its mortgage portfolio. Belling estimates that refinancing accounted for about 75 percent of the bank’s $95 million in mortgage business in 2002. “We have been in a refi boom here for almost two years,” he says. According to secondary market corporation Freddie Mac, 74 percent of applications for mortgages during the fourth quarter of 2002 came from people who were refinancing home loans. Freddie Mac also reports that mortgage holders who refinanced in 2002 lowered their rates by an average of 1 1/8 percentage points.
For months, the refinance boom has been a major stabilizer within a tentative economy. “Had this extra source of cash not been available, it would be safe to say that the national economy would have been in much worse condition,” says Frank Nothaft, Freddie Mac chief economist.
But all good things must eventually end. And community banks should be preparing now for the post-refinance environment. Hall advises banks to make strong efforts to connect with the traditional sources of business referrals—Realtors, builders, CPAs, attorneys and stockbrokers. “Now is the time when they are least busy,” Hall says, “because banks are taking orders on refis all the time.”
If the bankers wait until the market changes, Hall warns, they might find that their old sources have established new relationships. He says the one question a banker does not want to hear is, Where were you when we needed you?
Hall advises bankers to polish off their calling schedules and begin preparing new promotional materials. “It’s really a pretty straight- forward Marketing 101 scenario, but the key is to stick with it.”
In addition to vice president of Grafton State Bank, Belling is also president of CBG Mortgage, which, under the Grafton State Bank umbrella, provides mortgage services to Grafton and three other banks within the same holding company. Belling says that Grafton State Bank, which has assets of $158 million, has added only one employee to its processing department during the extended refinance boom. “We encouraged people to work overtime,” he reports. “We kept people in a positive frame of mind as best as we could. Some of us worked 70 to 80 hours a week.”
Jim Arthur, president of Pacifica Mortgage in Bellevue, Wash., agrees that it is important for banks to cultivate the people who have traditionally brought them their mortgage business. The goal, he says, should be to ensure that when the refi boom goes away, that banks have a method of acquiring new loans.
If all of this seems obvious, Hindman points out that it may not be so to community bankers who don’t view mortgage lending as a prime revenue source. Hall adds that there has been good awareness of refinance opportunities among banks with which he has worked through ICBA Mortgage’s programs. “They’re more in tune with the mortgage business,” he says.
Some banks are so attuned to the nuances of the market, Hindman says, that they are already cutting back on some of their refinance work to build rapport with Realtors and builders for the spring and summer home-buying seasons.
The agility of community banks gives them another advantage in the refinance market. A surge in business in one area can be handled by having employees pitch in wherever they are needed. This versatility is another reason why community banks are less likely to hire employees temporarily to meet peak demands.Arthur estimates that refinancing now makes up about 40 percent of Pacifica Mortgage’s portfolio. In more typical times, he says, refinancing would account for about 30 percent, with purchases and custom construction also bringing in about 30 percent each. Looking ahead, Arthur expects the bank to develop some Internet-based business.
Arthur says that refinancing has always been a significant area of activity for Pacifica Mortgage, which serves clients in four counties in western Washington state. “There are always reasons why people refinance,” he says. “They have kids going to college, etc. The list is fairly long.”
Hall does not know of an optimum amount of refinance business that a community bank might have during a normal market. It all depends, he says, on the institution’s comfort level.
Banks that find themselves overwhelmed by refinance business may choose to outsource some of their activity, effectively taking a smaller profit. Some banks, Hindman says, turn to ICBA Mortgage. Some, he adds, have relied on private mortgage insurance companies. Outsourcing can be particularly beneficial given the current squeeze on specialized skills. “Some banks stepped back and did less work in the loan,” he says, “simply to be able to keep up with demand.”
Belling says that Grafton State Bank does not outsource any part of its mortgage operation. “We do the origination processing, loan docs, closings. We sell directly to Freddie Mac and Fannie Mae. And we service the loans we have done.” Hindman says that information technology has made it easier for community banks to compete in the refinance market. He cites the contributions of Fannie Mae and Freddie Mac in enabling banks to run their loan portfolios online. “Without that technology,” he says, “there would have been a lot of lenders that simply would have been flooded over.”
Arthur says that the refinance boom did not create particular IT problems for Pacifica Mortgage in terms of gearing up for quick turnarounds. “We deal with a number of secondary market investors,” he says. “The timeframe slows down for them to do what they need to do for us to sell them the loans. But that’s not unique to us. That’s the industry.” The importance of planning for the next phase of the mortgage market is underlined by the impossibility of knowing how long the refinance market will last. “My crystal ball is broken,” Arthur says, when asked how long the boom might continue. “Your guess is going to be as good as mine.” Hindman expects rates to stay low at least until the middle of 2003. “But who knows?” he adds. “It depends on when the Fed begins to ratchet up rates. And no one is predicting that any time soon.”
Robert O’Connor is a free-lance banking writer.