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Lenders Prepare for Life After Strong Refinance Market

Lenders Prepare for Life After Strong Refinance Market By SHELLY GARCIA Senior Reporter Maybe the refinance market hasn’t dried up yet, but home mortgage lenders are beginning to act as if it has. Banks and credit unions are readying a variety of new product rollouts including expanded adjustable rate mortgage programs, new home buyer mortgage strategies and attractive home equity lines of credit in hopes of replacing some of the refinancing volume they anticipate will be lost as interest rates move upward. “We have hit the magic 6 percent level in fixed rate lending,” said Rich Gale, a board director with the California Mortgage Bankers Association and division president of Provident Bank. “We’ve seen a dramatic decrease in fixed rate demand at these levels. So it seems like refis will slow down dramatically.” After two years of record lows, mortgage rates began to climb upward late last year, resulting in a falloff of refinancing activity and spurring some to plan for alternatives. But just when most thought the upward swing would continue, mortgage rates in March fell to their lowest levels in a year, surprising the market and fueling another refinancing boom. That unexpected shift has made onlookers reluctant to predict the future, but with rates now in the 6.2 percent to 6.3 percent range versus 5.2 percent at this time last year, and evidence that the economic recovery will be sustained, most are planning for the increases to continue. Drop expected That means that the refinancing market, which over the past two years has accounted for some 60 percent to 70 percent of all residential mortgage activity, will likely fall off to about 20 percent of new mortgages, and lenders will have to look elsewhere to make up the lost volume. “Anybody managing a mortgage banking company today has to go after the home equity market,” said Gale. “We have to reemphasize and continue to build a sales force with loan agents that have good relationships with builders and Realtors, do more second deed lending and come up with a more complete menu of adjustable rate programs.” For Wells Fargo, which is planning to increase its market share in purchase mortgages by 20 percent over last year, it also means putting additional emphasis on the first time buyer and ethnic markets. “The largest gains in home ownership will be minority buyers so we have a substantial effort in that segment,” said Brad Blackwell, national sales manager for Pacific markets at Wells Fargo Home Mortgage. Wells is opening 30 standalone mortgage branches in ethnic areas. The company, which already operates one such branch in the city of San Fernando, will also open in Pacoima and Burbank. Along with those new locations, Wells plans to hire 250 to 300 additional loan officers familiar with the cultures and fluent in the languages of the ethnic areas where it will locate. For first-time buyers the bank has also expanded its Easy-to-Own program, specifically targeted to California where home prices have soared. The program gives those who earn up to 80 percent of the area median income a subsidized interest rate, about 1 percent lower than market rate. In April the program was expanded to offer no money down loans to those who earn up to 120 percent of median income. Washington Mutual has also put renewed focus on home purchaser mortgages. “What we have been doing since last fall and really throughout the refi boom was to focus on purchase borrowers,” said Harry Tomlinson, senior vice president at Washington Mutual. “We’re not doing anything different there, but with interest rates rising, they’re becoming a bigger focus.” When rates hovered in the low 5 percent range, a majority of home buyers and owners opted for fixed rate mortgages. But now that the rates are moving upward, adjustable rate mortgages, tied to changes in the market, can often offer lower payment options, at least in the short term. At WaMu adjustable rate mortgages accounted for 53 percent of the home loan origination volume in the first quarter of 2004, up from 27 percent in the comparable period last year. The bank plans to roll out a number of new lending programs later this summer, but in the meantime, it has tweaked some of its existing programs to attract more business. Increased flexibility WaMu has made its loan to value ratios more flexible and it has increased loan limits to accommodate some of the rise in real estate prices. It has also revisited its credit standards, making modifications that make it easier for those with non-traditional types of income for example to qualify for loans. “We have modified a good number of credit standards, and as a result, we’re seeing some borrowers we had not seen before,” said Tomlinson. Banks have been loosening lending criteria for some time as home prices have risen and the economy has shifted to include a larger population of people whose incomes do not fit the traditional lending profile. Those considerations bankers say, will become even more important going forward. “We have very flexible underwriting guidelines taking into account that all home buyers don’t fit in to the standard mortgage underwriting mode,” said Blackwell. “For those with low or no credit, we’ll construct an alternative credit profile. Second, we will allow a portion of the income to come from cash income. And then we do have trained underwriters that are accustomed to looking at the risk of borrower with alternative incomes to determine whether it’s a good risk or doing the right thing for the home buyer.” Finally, lenders say, they expect to see increased activity in home equity lines of credit.

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