Low Interest Serial Refinancing

June 13, 2003
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HOLLAND — It looks like 2003 is going to be a record year for mortgage originations.

The Mortgage Bankers Association of America forecasts $3 trillion in mortgages will be written during 2003, topping 2002's record-breaking mortgage origination volume by more than a half trillion dollars.

The MBA estimates that about $1.95 trillion of that total, or 65 percent, will be due to mortgage refinancings. 

"It is a phenomenal time to be in the mortgage business and it's obviously a great time for folks to both refinance their current homes or take a mortgage out on a new one," said Dana Cluckey, president and CEO of Republic Bancorp Inc.

"On all sides, it's a good time to be a borrower."

Republic itself is among the top 10 largest residential retail lenders in the Midwest, with some $3.9 billion in mortgage loans originated in 2002.

According to Freddie Mac, during the first week of June the 30-year mortgage had an average interest rate of 5.26 percent, a 15-year mortgage an average of 4.66 percent, and a one-year ARM (adjustable rate mortgage) an average rate of 3.59 percent.

"The length of a residential mortgage is 30 years, so there's probably no one out there who has rates at this level, particularly on a 30-year mortgage," Cluckey said. "Some of them get into a 30-year mortgage at 5.38 today, which after tax, is just a little over a 3 percent effective cost of funds.

"By and large the average rate over the last 10 years was 7.5 percent. So 2 percent on a $100,000 mortgage is $2,000 a year. That's almost $200 a month for a family. You're starting to talk about some real money."

Borrowers today realize how low rates are, and a lot of people are not really looking to do super short-term money, said Dave Stellin, senior vice president, Republic Bank in Holland.

"We're not doing any one- and three-year ARM products right now.

"Those rates are good, but the fixed rate 30-year is so good it's hard to pass up. With rates so low, if you're planning on doing something new with the house, right now is the best time to do it."

In this environment where interest rates are at 40-year lows, a lot of people are flipping their 30-year mortgage loan into a 15-year mortgage, which has been ranging between 4.75 and 4.87 percent, Stellin said. 

"It's been a very popular option because people are getting into that and they're not increasing their payment maybe by much more than $100 a month. So if people are consistently trying to prepay their mortgage anyway, a 15-year loan allows them to do that and tap into the low rate at the same time."

But most borrowers still favor long-term fixed rates, they both agreed.

Serial refinancing is not uncommon. A single household may easily have refinanced twice over the last three years, Stellin said. He said Republic Bank in Holland is presently refinancing customers for mortgage loans that closed in September 2002.

Customers have continued to call as rates go lower, but not everybody benefits in the same fashion. In most cases, refinancing for one-eighth or one-quarter percent doesn't make sense. But if the interest rate decreases by 0.75 percent to 1 percent, it probably makes sense to do it, Stellin said.

"Since none of us know when the bottom of the market is going to hit, you really have to ratchet yourself down a little bit at a time," Stellin said.

"We have people that call for a half-percent rate drop, and we're really telling a lot of those folks that don't have a very big loan that it just doesn't benefit them from doing it."

Cluckey said mortgage refinancings constitute about 60 percent of mortgage activity at Republic and about 70 percent of that across the United States.

Rates can go lower, Cluckey said. The question is, are they going to?

"There's the discussion of where the economy is at and the Federal Reserve tries to manage interest rates within that. It's not a perfect system that they have; it's a little easier for them to handle short-term rates than it is for them to manage long-term rates."

The Fed manages short-term rates by decreasing the federal funds rate — the rate at which banks themselves borrow money.

The Fed decreases that rate to stimulate the economy. If the agency determines the economy is still too sluggish, it could lower the current fed funds rate of 1.25 percent by as much as 1.25 percent to zero percent, but that's about as far as it can go, Cluckey said.

The market indications are that the Fed will probably lower the fed funds rate another 25 basis points, and that's already factored into the market now, he noted. 

"Right now I think it's a little bit of teeter-totter and people are in the middle on whether the economy is coming out, whether it's just holding its own or whether it's slightly declining," he said

There's conflicting evidence, Cluckey said.

He explained that consumer confidence is up and was fairly positive in May. On the other hand, he said, there are still a lot of commercial vacancies, and the price of commercial real estate has not been rising as has the price of residential real estate. 

Should people wait to refinance in the hopes rates will go down further?

"I would tell you that one is a bird in the hand," Cluckey said.

"A year ago when people refinanced they couldn't imagine it could go much lower. If you can economically justify doing it, I'm not sure that I would wait. Rates may move down a little bit more but they have the propensity to move up — and when they do, they will shoot up."

Republic Bancorp, with $4.8 billion in assets, is the third largest bank holding company headquartered in Michigan.

Its subsidiary, Republic Bank, operates 96 retail, commercial and mortgage offices that serve customers in Michigan, Ohio and Indiana.

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