Refinancings on Sharp Upswing

Home mortgage refinancings have increased sharply in recent weeks and are widely expected to accelerate early next year, giving a boost to the slowing economy by putting more cash in the hands of consumers.

The recent pick-up in mortgage refinancings follows a steady decline in 30-year fixed-rate mortgages, to an average of 7.4% this month from a high of 8.6% in May. And with the Federal Reserve signaling this week that it could lower interest rates next January to fight heightened risks of recession, mortgage bankers see brisk refinancing activity ahead.

“People are starting to jump back into the market,” said Brad Blackwell, a senior vice president at Washington Mutual, California’s largest home lender.

In the last two months, the number of refinancings jumped 20% in Los Angeles County and 34% in Orange County from a year earlier, according to DataQuick Information Systems Inc., a La Jolla research firm. It was the first time in more than a year that lenders reported an increase in activity.

Nationally, the Mortgage Bankers Assn. says refinancings accounted for 37% of bankers’ business in mid-December--far more than the typical range of 20% to 25%.

Although few analysts are expecting the kind of refinancing boom that was seen in 1998, the recent resurgence has prompted the Mortgage Bankers group to revise upward its projections for refinanced home loans next year, to $300 billion from $180 billion that is expected this year.

“It’s a positive element,” said Ted Gibson, chief economist at California’s Department of Finance. Gibson doubted that refinancings would be a major factor in the economy next year. “But it’s a plus,” Gibson said, adding that “at this point, we need a few pluses.”

When refinancing, many households take cash out of their home equity without necessarily raising their monthly mortgage payments because they are paying lower interest rates. Federal studies have shown that much of the cash taken out is spent, trickling into the economy.

In October, Chrysti and Randall Richardson refinanced their Ladera Heights home, which they bought for $320,000 more than four years ago. The Richardsons had refinanced once before about two years ago. This time they shaved more than a percentage point off their mortgage rate.

The Richardsons declined to say how much cash they took out, but said it helped them consolidate $20,000 in credit card debts and make some big purchases. They bought a refrigerator, traded in a Lexus for a Ford Explorer and plan to spruce up the dining room with plantation-style shutters. The refinancing lowered their monthly payments by 25%, said Chrysti Richardson.

“We’re not so pressured and strapped in making monthly payments,” she said.

For mortgage bankers, the revival of refinancings comes after months of declining activity.

“We’re getting inquiries, and people are asking our opinion, wondering ‘Is this the time to refinance?’ ” said Charles Peyton, president of Diversified Funding Group, a mortgage broker in Newport Beach. “It will be an active market. . . . If this were the middle of January, I think you’d hear the phones ringing in the background.”

Projections for increased refinancings hinge partly on expectations of an interest rate cut by the Fed at its next meeting at the end of January. The Fed raised the rate several times from June 1999 to February in an effort to fight inflationary risks, and that pushed up conventional 30-year mortgage rates. But since May, home loan rates have been declining, partly because of expectations of slower economic growth and a shift of investors’ funds from the volatile stock market to safer 10-year bonds, which track mortgage rates. If the Fed rate cut comes in January, analysts say, mortgage rates probably will decline further.

Moreover, Fannie Mae and Freddie Mac, two key mortgage investors, have increased the ceiling on the loans they will fund to $275,000 from $252,700, which would allow more people to redo their home loans. If home equity continues to rise, as is expected particularly in tight housing markets such as Southern California, more consumers will be tempted to tap their homes as a source of cash.

For all these reasons, some lenders say they are expecting a banner year in home refinancing.

“We see 2001 as good of a year in the mortgage business year as we had in 1998,” said Stuart Blend, a vice president at Provident Bank, whose largest customer base comes from Los Angeles and Orange counties. Blend says that home refinancing could account for about half of the lender’s business next year. “I think it will be tremendous.”

But other lenders and economists were not quite so sanguine.

Analysts note that many consumers already have refinanced homes, taking potential candidates out of the market. Moreover, the gap between the latest mortgage rate and what many are holding is not as big as it was two to three years ago.

G.U. Krueger, director of research at Institutional Housing Partners in Irvine, said that lower interest rates probably would have more affect in spurring people to buy homes than refinancing. The number of people refinancing homes will increase, Krueger said, but not enough to rank as a major boom.

“There will be some positive benefit, but it won’t be as large as several years ago,” he said.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Saving on Mortgages

As 30-year fixed mortgage rates have fallen recently to an average of 7.4%, more people are starting to renegotiate their home loans. In the last two months, the number of refinancing transactions has jumped 20% in Los Angeles County. Over time, the savings that homeowners enjoy could help spur the slowing economy by putting cash into consumers’ pockets.

Interest rates have fallen ...

Average rate for 30-year conventional mortgages

Dec. 14 (latest week): 7.42%

Number of refinances in Los Angeles County per month

November: 10,267

Sources: DataQuick, Freddie Mac