November 30, 2003
For Home Loans, a Steady Market
By EDWIN McDOWELL
HE residential mortgage market continues to be, by historic standards, exceptionally welcoming to borrowers, despite having poked above the 6 percent mark in the benchmark 30-year fixed-rate loan during the summer. It has fluctuated around that level since then, and last week it was at 5.89 percent.
While there have been only moderate shifts in rates over recent months, there have been other changes in the mortgage market with long-term implications for consumers. The great refinancing boom of recent years appears to be winding down. Adjustable-rate mortgages, typically less popular at a time of low rates, have stirred to life, moving from 14 percent of the market in the first quarter of this year to 26 percent in October.
The popular 30-year fixed-rate mortgage was as low as 5.23 percent in mid-June, according to the Freddie Mac weekly mortgage survey. A different survey, compiled by the Mortgage Bankers Association, registered an even-lower rate: 4.99 percent. According to the Freddie Mac report for the week that ended Nov. 28, the 30-year fixed mortgage now averages 5.89 percent, up from 5.83 percent the previous week. Last year at this time, the 30-year fixed-rate mortgage averaged 6.13 percent.
The average for the 15-year fixed-rate mortgage was 5.22 percent last week, up from the previous week's average of 5.17 percent. Last year at this time, the 15-year fixed-rate mortgage averaged 5.57 percent.
Interest rates on one-year adjustable-rate mortgages averaged 3.77 percent last week, increasing from 3.72 a week earlier. This time last year, the one-year ARM averaged 4.19 percent.
Douglas Duncan, the chief economist of the Mortgage Bankers Association, predicted that rates are unlikely to be any higher than 6.5 percent at the end of 2004 and that the average rate for next year would be 6.2 percent. He noted that relative to historical patterns, interest rates of 6 to 6.5 percent on 30-year fixed-rate mortgages are modest.
The share of adjustable rate mortgages has climbed in recent months, going from 19 percent in July to 25 percent in September and 26 percent last month, according to Freddie Mac, which buys mortgages and repackages them as securities.
"We're experiencing a major shift toward ARM's," said Steven Schnall, the chief executive of the New York Mortgage Company, adding that ARM's account for about 45 percent of the business at his 15 offices in seven states, including Florida and California. "At least half of our volume" involves jumbo mortgages — "meaning a mortgage over $322,700 for a one-family," Mr. Schnall said. "Our average jumbo fixed-rate mortgage is about $450,000, although we've also done jumbo mortgages in the $2 million and $3 million range."
Michael Brooker, a wholesale insurance broker, and his wife, Dawn Teczar, a chiropractor, bought a house at the end of June in New Canaan, Conn., that was built in 1722. The 3,000-square-foot house, which sits on one acre and which has three bedrooms and three bathrooms, cost $589,000. The couple took out a $471,000 30-year adjustable-rate mortgage with an interest rate of 5.25 percent for the first five years, and adjustable yearly thereafter.
"We bought the house because I wanted space for my office, and this house has an office attached to the house," Dr. Teczar said, adding that they also wanted space for their 9-month-old son, Alexander.
The most visible change in the mortgage landscape is the steep drop in the share of mortgages that are refinancings. Refinancings accounted for 75 percent of all new mortgage loans as of June, according to Frank Nothaft, the chief economist of Freddie Mac, but refinancing applications now account for less than 50 percent and are likely to fall to about 33 percent in 2004. "That is still a lot of refinances, Mr. Nothaft added, "but not compared with the past few years.
The falloff in refinancing has taken a toll on mortgage brokers and lenders. John E. Manning, a mortgage broker in Brooklyn, said that refinancing had accounted for two-thirds of his business until recently, but the refinancing share of his loans has now dropped by about half.
Stephen Crouse, a mortgage broker who owns C-T Associates in New Canaan, Conn., said that his refinancing activity and business in general are down 40 percent to 50 percent, but home purchases remain strong. "Although the total amount of purchases and refis is lower than business was before all the refinancing," he said, "the good part is that purchases have been increasing, so we're depending more on them than on the refinances."
Likewise, Eileen Witschger, a mortgage broker in Queens, said that her refinances had decreased significantly, but her purchases had picked up.
Robert J. Kerning, a mortgage broker in Valley Stream, Long Island, said that while business is down, largely because of the drop in refinancings, "people in this area are taking large loans, because the price of houses is through the roof."
Anne-Louise De Palo, a mortgage broker in Staten Island, said that her business had fallen about 20 percent because of the drop in refinances.
Richard J. Russell, the president of Richland Equity Resources in Manhattan, said that his refinancing business had dropped about 40 percent. "But there are still people out there who didn't take advantage of refinancing when rates were rock bottom," he added, "so they're refinancing now, even though interest rates are a little higher."
The drop in refinancings, economists and mortgage brokers say, is attributable not only to the increase in interest rates, however modest, but even more to the fact that many homeowners have already refinanced their mortgages — sometimes several times. In 2001 and 2002, refinancings totaled about 25 million loans, according to Mr. Nothaft, the Freddie Mac economist.
Harvesting Equity
Fewer Refinancings Involve Taking Cash
While more than half of those refinancing did so largely to reduce their monthly payments or to shorten the terms of their mortgages, according to mortgage brokers, lenders and economists who track mortgages, many homeowners who refinanced also cashed out part of their equity for a variety of purposes from improving their homes, paying off debt, financing college educations and buying a second home to less-lasting uses.
But cash-outs represent a smaller proportion of refinancings, according to Amy Crews Cutts, Freddie Mac's deputy chief economist.
"The cash-out share of refinancing this quarter remained at the same historically low level of 32 percent as last quarter," Ms. Cutts said, "as homeowners continued to refinance primarily for the low rate, rather than to take money out of their homes."
One such owner was A. E. Ferreira, who lives in Manhattan. The owner of a co-op and a condo, Ms. Ferreira refinanced both properties two months ago. In order to lower her 11 percent rate on the co-op, she took out an adjustable loan of 4.25 percent that is subject to revision monthly, with a lifetime cap of 8.95 percent. And to lower the rate on her condominium, which was also 11 percent, she took out 15-year fixed-rate mortgage at 5.25 percent.
"But I didn't take out money," Ms. Ferreira added," because I'm not yet confident about the economy."
Even at a time when rates are rising, said Mr. Duncan of the Mortgage Bankers Association, "there are still some people who refinance their first mortgage.
"We saw evidence of that in 1999 and 2000, while total refinances were way down, as much as 80 percent of people who did refinance in those higher rate environments refinanced for the purpose of extracting equity, and at a slightly higher average rate than on the previous mortgage."
While refinancings are dropping, the basic engine of the mortgage market is strong. "Home sales are near record levels," said Keith Gumbinger, a vice president of HSH Associates, a financial information publisher in Butler, N.J.
If this year's sales of new single-family homes come anywhere near the National Association of Home Builders forecast of 1,065,000 sales, it will be the best year ever since the association began tracking sales numbers in 1963. The record was set last year when 977,000 new homes were sold, up from 907,000 in 2001.
"Starts and permits have been running at an elevated pace since the summer," said David Seiders, the chief economist of the home builders group, "and fundamentals suggest that this strong new-home market should carry through into 2004."
Paying Points
Upfront Fees Are Less Onerous
Whether buying new homes or existing properties, borrowers are likely to come face to face with the issue of paying points, although the impact of that confrontation with an upfront fee has lessened in recent years. (Each point represents 1 percent of the loan amount.)
Simply stated, the higher the points paid upfront, the lower the interest rate on the mortgage and the lower the resulting monthly payments. The size of the monthly payment is a key element used by lenders in determining if a prospective borrower qualifies for a loan.
"Consumers have never had any great appetite for paying points," Mr. Gumbinger said. "With interest rates as low as they are, it's not necessary for consumers to pay points to lower the interest in order to qualify for a loan."
Another reason for the less frequent use of points, according to Mr. Crouse of C-T Associates in New Canaan, is that "there are many more mortgage brokers with access to a greater number of mortgage lenders than ever before, which enables the consumer to have access to more competitive rates than when banks were the sole provider of mortgages."
Interest-Only Loans
Lower Payments, Entirely Deductible
A type of loan that is becoming somewhat more common, according to Mr. Schnall of New York Mortgage and other brokers, is the interest-only mortgage. Such mortgages enable borrowers to pay only interest each month and none of the principal. But at the end of the interest-only period, the borrower has to pay the principal over the remaining term of the loan.
Michael L. Moskowitz, president of Equity Now, a Manhattan mortgage lender, said interest-only mortgages "account for maybe 5 percent of our business, but most of those loans are in six to seven figures."
But not all interest-only mortgages are in the stratosphere. Deborah and John Murphy of Manhattan, she an interior designer and he a lawyer, took out a five-year $250,000 interest-only mortgage in June with an interest rate of 4.875 percent to buy a condominium in Manhattan. By taking out that loan, from Washington Mutual, they substantially reduced their mortgage payments, although at the end of five years — whether the value of their apartment has gone up or down — the Murphys will still owe the lender $250,000. But they can also deduct the $1,015 monthly interest on their income taxes.
Their loan is saving them $345 a month, compared with a five-year $250,000 conventional loan, which at the time they took out their mortgage carried an interest rate of 5.125 percent.
Amir Korangy, the publisher of The Real Deal, a magazine about real estate, had a 30-year fixed-rate loan of $115,500 on an investment co-op in Brooklyn with an interest rate of 7.25 percent. So early this month, in order to buy a condominium apartment, also in Brooklyn, he refinanced his loan, taking out a $117,000 monthly adjustable rate loan at 4.25 percent with a lifetime cap of 8.95 percent.
Mr. Korangy has extensive personal experience in financing real estate. In 2000 he bought a Manhattan co-op apartment as his residence, moving from a rental apartment in TriBeCa. To date he has bought a total of six apartments and has sold four of them.
Two of his loans have been adjustables, including an interest-only mortgage he took out last May to buy a brownstone in Washington, D.C., as investment property. "I got an interest-only mortgage so that I could pay as little as possible each month," Mr. Korangy added, "because the house is being refurbished and in several months it will be put back on the market."
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