Morphing mortgages




From the June 3, 2005 print edition

Morphing mortgages
Loan companies change strategies, products to recoup lost business
Ed Green
Business First Staff Writer

As mortgage rates have crept higher from recent all-time lows, the refinancing boom that generated record volumes for mortgage businesses has dwindled.

As a result, brokers and lenders in the Louisville area are trying new ways to market mortgage loans to consumers.

Many of the area’s largest mortgage businesses have begun focusing their efforts on attracting a steadier flow of income from new loans rather than focusing on refinancing volume, which is dictated primarily by low rates.

Officials with area banks and mortgage companies also say they are challenged with educating consumers about popular, new mortgage products, which might or might not be good financial options for consumers.

Largest mortgage firms report drop in loan volume

According to information compiled for this week’s list of the area’s largest mortgage brokers, the overall volume of loans made last year by 17 of the 20 largest mortgage brokers in the Louisville area fell 7 percent from 2003.

The three firms not included in the calculations did not report volume figures for 2003.

The overall volume of those loans was $4.07 billion, compared with $4.37 billion made by the same firms during the previous years.

The average loan amount fell to $136,364 from $138,626 in 2003.

The overall volume of loans made by the 10 largest lenders on Business First’s list fell last year to $3.49 billion from $4.67 billion in 2003.

The average loan amount rose to $156,506 from $148,623 in 2003.

Many of the brokers and lenders surveyed for the lists said the drop in loan volume is directly related to the higher average interest rates for mortgage loans.

The average mortgage rate nationally still is less than 6 percent so far this year, according to information from the Federal Home Loan Mortgage Corp., also known as Freddie Mac.

But local sources said most homeowners already have refinanced, locking in the historically low rates offered during the past two years.

As a result, there no longer is a large market of consumers looking to refinance.

Jeff Houk, CEO of First Commonwealth Mortgage, the third-largest mortgage broker on this year’s list, said his firm “definitely” experienced a drop in business as a result of fewer refinancings.

Both the mortgage lenders and mortgage brokers lists are ranked by total volume of loans closed.

First Commonwealth, based in Louisville, closed 4,766 loans in 2004 for a total volume of $592.3 million. During the previous year, the company closed 5,415 loans for a total volume of $689.9 million.

“Refinancing slowed down quite a bit,” said Houk. “So we shifted our business a little bit” to concentrate marketing efforts toward loans for purchases.

In 2004, refinancings made up about 70 percent of First Commonwealth’s business, compared with about 98 percent in 2003, Houk said.

Don Rupert, president of Louisville’s Mortgage Network Inc., echoed Houk’s comments about fewer refinancings.

In 2003, more than half of the firm’s volume came from refinancings, Rupert said. Last year, 65 percent of Mortgage Network’s business came from purchases, and only 35 percent resulted from home refinancings.

Mortgage Network’s overall loan volume dropped to $65.9 million in 2004 from $163.8 million in 2003. The number of loans closed fell to 452 from 1,160.

The firm dropped from No. 4 on last year’s mortgage brokers list to No. 11 this year.

“It really hurt us,” said Rupert, adding that the decline in business has not resulted in layoffs of any full-time employees.

Some firms changing strategy to respond to higher rates

Rupert, Houk and others said their volumes of loans from purchases have remained steady or risen slightly, but that new loans are becoming a larger percentage of their overall volumes as a result of the decline in

The increase in purchase loans in 2004 mirrors a strong year for area home sales — a trend that in continuing this year, according to Lisa Stephenson, executive vice president for the Greater Louisville
Association of Realtors.

The number of homes sold in the Louisville area by members of the Realtors association grew by nearly 8.7 percent in 2004, to 13,916 from 12,805 in 2003.

So far this year, home sales through April are up about 8 percent from 2004, with 4,152 homes and condominiums sold.

That increase is one reason that businesses such as Mortgage Network are concentrating more on marketing to home buyers rather than trying to attract refinancing business from existing owners, Rupert said.

“We’ve stepped up our efforts in trying to attract purchase business by soliciting that customer base as well as real estate agents,” he said.

David Vest, executive vice president and chief lending officer for Republic Bank & Trust Co., reports similar changes in mortgage activity.

Vest, whose company ranks as the largest area mortgage lender for the fourth straight year, said his firm also has seen a drop in refinancing business but “purchase volume has increased significantly.”

Overall mortgage loan volume for Republic fell to $804.9 million through 4,850 loans in 2004, down from $1.41 billion through 10,357 loans in 2003.

“We constantly work to stay in front of the Realtor community,” said Vest. “We make calls, give coupons (to Realtors) to give to purchasers. That purchase business is very important to our success.”

Relationships between Realtors and mortgage lenders and brokers is not uncommon, said Stephenson, adding that several mortgage businesses are affiliate members of the Realtors association.

Stephenson declined to comment on specific relationships, but she said the real estate and mortgage industries work hand in hand to help home buyers with purchases.

New loan products also becoming popular

According to information submitted for Business First’s mortgage lists, a range of new products also are helping lenders and brokers keep business.

Although several of those who responded to the list survey could not be reached for interviews prior to Business First’s press deadline, many said in their surveys that popular new loans being sought by borrowers in Louisville are interest-only and five-year, adjustable-rate loans.

The five-year ARM — a “hybrid” because it has properties of fixed and adjustable loans — has become such a popular offering that the Federal Home Loan Mortgage Corp. began tracking its average rate nationally this year, according to the Freddie Mac Web site,

As of May 19, the average rate nationally for a five-year ARM loan was 5.07 percent, compared with 5.71 percent for a traditional 30-year, fixed-rate loan.

Vest said the five-year ARM, which offers a fixed rate for the first five years and then converts to an adjustable-rate loan, has become the bank’s most popular mortgage product.

“We purposely priced our (five-year, adjustable loan) between the 15-year and 30-year products,” said Vest. “Sometimes there is a significant savings” with an adjustable rate if the buyer isn’t going to stay in the home for 15 or 30 years.

Interest-only loans are options for some

Interest-only loans also are gaining the attention of many consumers, especially those who want low monthly payments, according to mortgage officials.

First Commonwealth’s Houk said he thinks the new loans have “gained a little traction here recently.”

But his firm still closes primarily 30-year, fixed-rate loans.

“Interest-only loans are good” options for some people, but “you’ve got to be the right borrower,” said Houk, adding that he might suggest them for a client who has irregular income, such as someone in sales.

Rupert compared the popularity of the two products to the increase in previous years of “no money down” loans. “The advantage of interest-only payments, (is that) it gives the borrower greater flexibility in their
monthly payments. The borrower can choose how much they pay on the principal.”

Houk added that the loan products “are really for an astute borrower.”

“You have to have a little bit of risk tolerance and discipline,” he said.

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