BusinessReport.com

New homebuyers might still be sitting on the fence, but customers interested in refinancing their homes have come out of the woodwork in the past five months.

They are taking advantage of interest rates that plunged to almost 4% at the beginning of the year and have slowly increased since then before hovering under 6%.

Sharon Jenkins, the senior vice president and mortgage production manager for Regions Bank, has a simple explanation.

“It’s definitely the low interest rates,” she says. “If people are interested in trying to refinance, now is definitely the best time to try.”

Mortgage refinancing at Regions shot up by 100% in the first quarter of 2009 in a service area that includes Baton Rouge, Houma and Lafayette. In April and May, 80% of the bank’s loan activity has been in mortgage refinancing. The Birmingham, Ala.-based institution does not release monetary amounts outside of quarterly reports.

IberiaBank Mortgage has seen a 63% increase in refinancing from the first quarter of 2008 to the first quarter of 2009, a difference of $90 million statewide. In the Capital Region, the Lafayette-based institution has refinanced more than 100 homes for a total of $23 million in the first quarter of this year.

“Even though the rate has increased in the past two weeks,” says Teresa Breaux, IberiaBank Mortgage president, “customers still have more purchasing power right now.”

Hancock Bank closed 71 refinance transactions in April, 68 in May and 27 since June 1, Mortgage Division Manager Daniel J. Zoble says.

The new loans have bolstered Gulfport, Miss.-based Hancock’s mortgage division in the first half of 2009. But there’s a down side. By financing loans with lower interest rates, banks are making less of the interest.

“The refinance activity is a double-edged sword,” Zoble says. “The new loans create income for the bank, but we are often replacing higher-rate loans in our portfolio with lower-rate loans.”

Most mortgage loans are not held by the banks that originate them, says Kelley Pace, the director of LSU’s Real Estate Research Institute and a finance professor in LSU’s E.J. Ourso College of Business.

Most 30-year loans are sold at a profit to investors in the form of mortgage-backed securities, which lose some value if the original loans are refinanced at a lower interest rate.

But that does not affect the institutions originating the mortgage loans, and refinance loans driven by the low-interest rates also have helped fill in the gap left by falling new mortgage loans.

“For people that make money in origination and mortgages, both new loans and refinanced loans are welcome,” he says. “The lower rates help the overall housing market because the overall payments are lower. That’s attractive for people in the market.”

Mortgage rates this time last year were a full percentage point higher with an average 30-year fixed mortgage rate at 6.62%, which would make a $200,000 loan carry a monthly payment of $1,279.96. The average rate on a 30-year fixed rate mortgage earlier this month was 5.47%, which would make a $200,000 loan carry a monthly payment of $1,131.82.

Kendal Matassa, Region’s South Louisiana Area Marketing Manager, says the bank has not changed its credit standards for mortgage loans since the financial market began to show signs of stress in September.

“I don’t think that we’ve had a massive credit change in the past six to 12 months,” Matassa says. “Most customers will approach us because of the low rates, and then Sharon’s team will assess whether or not they can redo the loan.”

For some customers, that means a lower credit score might not allow them to take advantage of the lower interest rates.

“If someone decided to refinance to take advantage of the lower interest rates and they have a lower credit score, they’ll get a higher rate, so why refinance?” Jenkins says. “If you have a very good credit score, or even if you’re somewhere in the middle, this is a good thing.”

Credit standards are no less stringent for people looking to refinance than for new homebuyers because the underwriting process still determines specific risk attributes in order to make a decision for a specific loan request.

The biggest difference is that customers looking to refinance have built up equity in their home, which might allow them to get a loan even if their debt ratio is higher.

“The big difference here is that homeowners would typically have more equity in their property than a homebuyer has in a down payment,” Zoble says. “The loan-to-value ratio is still a big part of the underwriting criteria.”

While more people would take advantage of the low interest rates if credit standards were less strict, he says that caused the issues the banking industry is facing today.

“Loosening credit standards is what got us here in the first place,” Zoble says. “It is likely that the pendulum did swing a bit too far to the conservative side of things, but then that is what usually happens when excess in any market creates big problems.”

The Mortgage Bankers Association reported the refinance share of mortgage activity decreased to 54.1% the week of June 12, a 5.3% drop from the previous week. Breaux expects mortgage refinancing will slack off in favor of new home purchases as the year progresses.

“You’ve had so many people sitting on the sidelines just watching the market,” she says. “Now that rates are beginning to increase and we’re no longer at the bottom, those people are going to realize that it’s time to purchase a home.”

Pace says homebuyers who have taken a wait-and-see approach will probably become more serious about following through on a home purchase.

“People like that see the rates go up, and think they’ve missed out on an opportunity,” he says. “They’ll become a little more serious about buying a home, wait for the next dip in rates and then jump at the opportunity.”

CRUNCHING NUMBERS

Homeowners looking to refinance their homes have turned out in droves because of low interest rates. For the week of June 12, those rates were:

5.50% for a 30-year fixed-rate mortgage

4.99% for a 15-year fixed-rate mortgage

6.54% for a one-year adjustable rate mortgage

SOURCE: Mortgage Banker’s Association 
Weekly Application Survey