heard on the street
The End of the Refinance Era
continued from page 20
By John Walsh
Mortgage Professionals to Watch
PHH Mortgage has named Smriti Laxman Popenoe as interim president.
Nathan C. Brown has been named chief legal officer and senior compliance manager of MountainSeed Appraisal Management. GSF Mortgage has announced that Rich Obermeier has joined the company as branch manager/loan originator, and that Mark Rossetto has joined the company as a loan specialist.
Joe Mowery has been named president of LenderLive Settlement Services.
Gregory Chi has joined Mortgage Guaranty Insurance Corporation (MGIC) as senior vice president and chief information officer. Loan Value Group LLC (LVG) has announced the addition of Kelly Johnson and Kim Schubert as directors of sales. Molly Reed Davis has been named chief credit and compliance officer for Gateway Mortgage Group. Cobalt Mortgage has announced the addition of Matt Eckard, sales manager of The Eckard Team. WFG National Title Insurance Company has added Robert Opdycke as an agency sales rep in the Southeast region.
Appraisal Logistics has named Dennis H. Ashcroft vice president, sales and marketing.
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Holt Crowder and Brian Smith have joined LendingQB as sales reps to the firm’s business development team.
Platinum Data Solutions has named Phil Huff as its new chief executive officer.
Jeffrey R. McGuiness has been named chief executive officer of Lenders One Mortgage Cooperative.
Lisa Marra has been named Maryland area renovation sales manager for Real Estate Mortgage Network Inc. (REMN), and REMN has also added Matt DeCesaro as branch manager for the firm’s Duluth, Ga. location. Atlantic & Pacific Real Estate has announced the addition of Wendy Forsythe as executive vice president/head of global operations.
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Are you prepared for the end of the refinance era? If not, then I suggest you get your business ready, because a change in the fundamental make-up of our industry is not far away. Recent reports and comments from the Federal Reserve and economists with major U.S. banks describe a housing sector that has fundamentally changed from historical norms, and one that will not return to those norms during our lifetimes. However, we will almost certainly see mortgage rates rise to their historical norms. The recent period following the housing bubble has seen mortgage rates significantly below historical levels. Once rates rise, they are not likely to revisit these levels—short of another monumental crisis. We need to let consumers know that now may be the last chance many in the U.S. will have to refinance for cash-flow improvement or to move to less risky mortgage products. During the aftermath of the housing bubble, the Federal Reserve has provided substantial liquidity to the U.S. economy that has helped to artificially drive and keep mortgage interest rates low. In so doing, the Federal Reserve has “lubricated” the troubled housing sector. The Fed’s “Zero Interest Rate Policy” has helped keep the mortgage industry afloat over the past few years. What will the mortgage industry look like when the liquidity ends and rates rise beyond the level of most current in-force mortgages? Simply put, it will be a much smaller industry that is overwhelmingly focused on purchase financing.
What evidence supports this conclusion? First, in early February, Federal Reserve Chairman Ben Bernanke submitted a Fed study on the state of the housing sector to Congress. In it he stated, “… restoring the health of the housing market is a necessary part of a broader strategy for economic recovery.” But he added that there were many “frictions” in the market that were preventing that recovery, including ongoing foreclosures and the resulting overhang of housing supply. Moreover, a paper by economists at JP Morgan Chase, Bank of America, and the Universities of Chicago and Wisconsin released in late February argues that the Fed should be very cautious about policy responses to those frictions. They write, “A mistake would be to adopt policies that seek to artificially boost house prices and residential investment going forward.” The authors believe that the housing bubble represented a “dramatic overinvestment” (based on historical norms) in housing
“We need to let consumers know that now may be the last chance many in the U.S. will have to refinance for cash-flow improvement or to move to less risky mortgage products.” and that it will take decades for the market to return to normal. Their proposed prescription—as painful as it might be—is to allow for the housing sector to revert to historical norms. This would include higher loan-to-value (LTV) ratios and higher average interest rates. Clearly, they would argue against any further quantitative easing from the Fed. This same paper makes another point that is the focus of this article, namely that the current low interest rate environment, brought about through a zero percent Fed Funds rate for the past three years and $2.3 trillion in asset purchases, have enabled almost everyone capable of benefitting to benefit. Commenting on this aspect of the paper, president of the St. Louis Federal Reserve Bank, James Bullard, said, “Those that can respond to the lower yields have done so already and those that cannot will not be influenced by further policy actions because they are backed up against sharply binding collateral constraints.” The implication for the mortgage industry is quite simple … even further quantitative easing including the purchase by the Fed of additional mortgage-backed securities (MBS) is not likely to significantly increase refinancing activity.
So … where does that leave us as an industry? The fact is that we could be one news story away from significantly higher interest rates. Rates have been held low by Fed action for sure, but also by a year’s worth of bad news that may be quickly improving. The ongoing weakness of the U.S. economy and job market is reversing course, the negative after-effects of the Japanese Tsunami (at least on the global economy) is waning and the impending default of Greece and the collapse of the European banking sector are delayed at worst, avoided at best. Currently, concerns over the price of gas on the U.S. economy due to tensions in the Middle East, along with the Federal Reserve’s purchase program for mortgage-backed securities, known as “Operation Twist,” are helping to keep mortgage rates near alltime lows. But these beneficial governors on mortgage rates could decline in significance, or be eliminated altogether, very soon. Operation Twist, for example, is scheduled to end by the middle of 2012. The fact is that the era of refinancing is coming to an end sooner rather than later.