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The future of refinancing

 

While refinances still dominate mortgage-lending activity, with the Mortgage Bankers Association saying that refinance business accounted for 64 percent of the mortgage loans made during the week ending Nov. 15, the numbers seem to be diminishing each week.

As mortgage rates continue to rise, fewer homeowners will refinance. This shift in lending activity has already forced thousands out of the mortgage business, meaning you might have fewer mortgage lenders to choose from when it comes time to purchase a home.

Complicating matters even more is the new Qualified Mortgage (QM) rule that is scheduled to go into effect January 10, 2014. This rule will require mortgage lenders to more closely study your financial information to better determine whether you can afford to repay your loan.

Read: 7 reasons to refinance now

Where, then, will mortgage lenders get their business in 2014 and beyond once refinances dry up? If lenders can't make up lost business, even more will be forced to shut their doors, resulting in fewer lenders and potentially higher costs to refinance or purchase.

Home purchases will lead the way

"Most of the lending business in the future will be made up of new purchases," said Wade Micoley, president and chief operating officer of WM Enterprises in Green Bay, Wis., and online auction house Micoley.com. "The business will go back to the old way of doing things. This has happened before. When rates go up, people stop refinancing. When rates are stable and moving up, you hope that people are interested in buying."

The mortgage-lending business is already feeling the negative impact of rising mortgage rates and lower refinance volumes as some of the nation's largest mortgage lenders are laying off thousands of employees in their mortgage departments. Wells Fargo warned investors that its mortgage volumes would drop by more than 30 percent in the third quarter, thanks largely to the dwindling refinance business.

And this will only continue as mortgage rates continue to creep higher. HSH.com reported that the average interest rate on a 30-year fixed-rate loan stood at 4.41 percent for the week ending November 29, up from 4.37 percent the previous week. The average rate on a 15-year fixed-rate loan had increased from 3.48 percent to 3.51 percent during the same time.

Lanny Baker, chief executive officer of ZipRealty in Emeryville, Calif., says that the mortgage lenders he speaks with are also reporting that refinance numbers are dramatically dropping.

"Relative to the pace of refi activity we were seeing nine months ago, it is now virtually non-existent," he says. "Some numbers from banks would suggest that they are seeing 10 percent of the refinance activity they had a couple of quarters ago."

Baker says that the days of serial refinancers -- homeowners who refinanced more than once -- are long gone. This, though, is nothing new, Baker says.

"Rates have ticked up before. But they will go down, too," Baker says. "Right now we're in a bit of a holding pattern as far as rates are concerned. But rates always go up and down. Once they reach a certain level and then start going down again, you will see refinance activity return."

QM rule

Lenders hoping to make up their lost business by closing more purchase loans will first have to navigate the new QM rule. The new rule could result in lenders not being able to write as many loans as they could before. Combined that with the drop in refinance activity and some lenders may have to close branches or lay off more employees. Other lenders might simply shut their doors.

Cameron Findlay, chief economist at Discover Home Loans in Irvine, Calif., says that the new QM rule will mean fewer choices for consumers already struggling with shaky credit and other financial weaknesses.

"Most consumers are not aware of the fact that the QM rule might take away some of the lending options that are now available to them," he says. "After the rule, they might have a smaller bucket of alternatives available to them."

Higher mortgage rates, fewer refinances and QM's restrictions could lead to fewer mortgage lenders, which might make it more difficult for you to get a mortgage in 2014 and beyond.

About the author:

Dan RafterDan Rafter has more than 20 years experience writing about the mortgage-lending business. He has written for publications such as the Washington Post, Chicago Tribune, Business 2.0 Magazine, BusinessWeek online and Consumers Digest.

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