ST. LOUIS POST-DISPATCH
A rush of mortgage refinancings is reviving the St. Louis mortgage business, which was flat on its back just two months ago.
Rates on a 30-year mortgage averaged 4.96 percent last week, according to the national mortgage giant Freddie Mac. That was the lowest in the 38-year history of the company’s survey.
Low rates are sending home owners running to refinance. The Mortgage Bankers Association’s national index of refinancing applications has risen sevenfold in the last two months.
It’s welcome news in a business that spent most of 2008 in deep gloom. Among other changes in the local mortgage industry:
•The revival the Federal Housing Administration as a major player in the mortgage market. With the disappearance of subprime lending, local institutions are using FHA loans as a way to extend mortgages to borrowers with little down payment or black marks on their credit.
•The disappearance of lots of players in the mortgage business, from brokers to mortgage purchasers to paperwork processors.
•Tighter lending standards are making it harder for good borrowers to land a conventional mortgage.
When Amy Shaw heard that rates were near 5 percent, she knew the moment had come to refinance. “How could you not hear it? The word was everywhere,” she said.
She and her husband own a 118-year-old house in the south St. Louis neighborhood of Benton Park. They had refinanced a year ago at about 6 percent interest. “For mortgages to go to 5 percent saves us $200 a month,” she said.
Lots of other people are making the same decision. “We’re doing as much business in one month now as we were doing in three months before,” said H. John Frank Jr., president of Paramount Mortgage in Creve Coeur. “Now, people are working until 10 and 12 at night.”
Shaw had good credit and equity in her house. She had no problem in getting a loan from Gorman & Gorman Home Loans.
Others aren’t so lucky. Lenders are tightening standards for conventional mortgages — the plain vanilla loans made to people with good income and good payment histories. Some lenders have raised credit score requirements, and most are checking information on applications more carefully. “It’s ‘Where’s this? How did you come up with that?’” Frank said.
The credit crisis began with widespread defaults on subprime mortgages — the type issued to people with inadequate income and poor credit. Many lenders didn’t verify borrowers’ income, and some borrowers lied about it.
The subprime mortgage business is dead, but its Depression-era granddaddy lives on. Mortgages backed by the government, mainly the Federal Housing Administration, captured a third of the mortgage market last year, according to a Mortgage Bankers Association survey.
In the St. Louis area, the FHA backed roughly 20,500 loans by mid-December, compared to 8,300 in 2007 and 6,300 in 2006, according to figures from the Department of Housing and Urban Development.
FHA quickly has emerged as the favored way for people with little down payment or problems in their credit history to land a mortgage.
Many mortgage players — including many former subprime shops — are applying to become FHA-approved lenders. There are 458 in St. Louis as of November, up from 208 two years ago.
The FHA was formed in 1934 as the government’s original subprime lender in an era where it took a 50 percent down payment to get a mortgage. The agency insures loans to people with tiny down payments — just 3.5 percent of the purchase price — and it accepts more scars on credit reports than conventional lenders.
But the FHA never winked at borrowers who couldn’t document their income, and it never issued loans too big to be repaid. It usually requires that mortgage payments take no more than 31 percent of the borrower’s income and that all consumer debt take only 43 percent.
“FHA loans are fully documented with absolute verification of income and credit,” said Neil Volkmann, a lender at First National Bank and president of the St. Louis Mortgage Bankers Association.
Partly for that reason, FHA lending was moribund during the subprime lending boom. Lenders found it easier to make subprime loans, especially when borrowers had shaky income.
The rush to refinance caught the industry flat-footed after a year spent cutting jobs. For instance, Citimortgage in O’Fallon, Mo., last month confirmed plans to cut 104 jobs, following 86 job losses announced in October and 159 in March.
Mortgage brokers also took a heavy hit. In 2007, there were 630 licensed mortgage brokers in Missouri, each employing an average of five people. Last month, the number of licenses was down to 313 and falling, according to state figures.
Mortgage brokers don’t make loans themselves. Instead, they act as middlemen, matching borrowers to mortgage issuers. Local mortgage banking firms, which issue their own loans, seem to have survived last year’s crunch better.
Now, some firms are finding themselves short-staffed amid the “refi” boomlet. Gorman & Gorman, for instance, recently hired six workers, bringing its staff to 35.
The refinancing rush is producing sudden changes in interest rates. “Even with in the same day, we’ll see a three-eighths (percentage point) swing in rates,” said Mark Gorman, president of his namesake firm.
Gorman sells his mortgages to institutions further up the financial food chain. The problem is that fewer institutions are buying mortgages these days. Some of them, such as IndyMac bank, have been seized by the government. Other sick players, such as National City, are being gobbled up by healthier banks.
The remaining players have internal limits on how many new loans they’ll accept. When one hits its limit, it suddenly jacks up its interest rate. Thus the volatility.
The impact of the credit crisis hits hardest on people who need “jumbo” mortgages — those over the $417,000 limit. Before the panic, interest rates on jumbo loans were about a quarter point above conventional mortgages. Now, the difference is three percentage points, said Gorman.
Fannie Mae and Freddie Mac are the biggest buyers of mortgages in the country. They generally won’t buy loans over $417,000, so lenders charge more for such loans.
