Climbing interest rate slows refinance boom

Dan Donoghue and his wife, Lisa, in front

Dan Donoghue and his wife, Lisa, in front of their Fort Salonga home. (Sept. 27, 2013) Photo Credit: Johnny Milano

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The mortgage refinance boom is ending on Long Island as in the nation, a change that will take some wind out of the sails of a modest economic recovery.

Since early May, the interest rate on a typical 30-year mortgage rate has risen almost one percentage point, to 4.32 percent, according to mortgage finance giant Freddie Mac.

That rise has choked off banks' refinancing business by reducing the money homeowners save by paying off their old mortgage with a new, lower-rate deal.

What that means, in turn, is that fewer homeowners have a boost in discretionary income that they might spend on things like home improvements, gasoline, college costs or paying down debt.

While it's hard to calculate how much of a boost such refinancing gave to Long Island, it appears considerable.

At Bethpage Federal Credit Union, one of the Island's largest mortgage lenders, president and chief executive Kirk Kordeleski estimates that his refinance customers saved a total of about $56 million in interest from 2009 through 2012.

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Add that to the savings won by refinancing customers of others lenders such as Wells Fargo and Chase, he said, and "a lot of money went into people's pockets to help the Long Island economy during that time."

Lower payments

Bill consolidation and lower monthly mortgage payments were key drivers of the refinance boom.

Dan and Lisa Donoghu,  of Fort Salonga, accomplished both when they refinanced in May through Lynx Mortgage Bank LLC in Westbury. Their interest rate went down from about 3.88 percent to 3.5 percent, they lengthened their term from 15 years to 20 and took cash out.

"My two boys are in college and my daughter got married in August, so I had some big bills I wanted to take care of," said Dan, 51, a New York City Fire Department deputy chief in Manhattan and a registered nurse at Brookhaven Memorial Hospital Medical Center in Patchogue.

The couple -- Lisa is also a nurse -- bought their house in June 2001 with a 30-year mortgage at about 7 percent and had refinanced twice before, Dan said. They got lower rates and shortened the term to 15 years. "After my younger son gets out of college in three years, then we'll have the option of prepaying to get us back to where we're hoping to be -- retiring without a mortgage," he said.

Nationally, the Mortgage Bankers Association trade group in Washington says refinancing nationwide fell 18 percent from $388 billion in the fourth quarter of last year to $316 billion in this year's second quarter and is forecast to fall by another 40 percent from the second quarter to the current, third, quarter.

The boom was great while it lasted. Irwin Kellner, chief economist for MarketWatch, a financial news website, says refinancing helped keep the recession from being worse by helping spur consumer spending. "Obviously, had the refi boom not been in place, chances are the recession would have been prolonged," he said, "and the recovery been weaker than it is now."

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Amid the housing market crash and recession that began in late 2007, rates for 30-year loans had dropped to a record low of 3.31 percent in November 2012. In early May this year, before the recent uptick in rates, the rate was 3.35 percent. Those historically low rates fueled the boom in refinancing.

Hints about stimulus

Interest rates suddenly began rising when the Federal Reserve Board began dropping hints that it would begin to reduce its economic stimulus efforts -- which had been largely in the form of federal bond purchases.

While the Fed said on Sept. 18 it would continue buying $85 billion in bonds each month until it sees more signs of lasting improvement in the economy, the focus has now shifted to when that buying will end.

Eventually, said Lawrence Yun, chief economist for the National Association of Realtors, the Fed will ease back on its stimulus. And an improving economy suggests higher inflation, which normally leads to higher interest rates. "All forces suggest that mortgage interest rates have to rise going into next year," said Yun.

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President and chief executive Michael McHugh at Continental Home Loans Inc. of Melville, agrees: "It's not going back anywhere near the three percents."

The end of the refinance boom has hit some national banks hard. Wells Fargo, Bank of America and Citigroup have announced a total of about 7,000 layoffs since the start of summer. Representatives for all three said none of their cuts were made on Long Island.

Locally, one bank has so far reported that the end of the refinancing boom has put a squeeze on earnings. New York Community Bank, the Westbury company that is the largest bank headquartered on Long Island, cited the downturn as a factor in a 60 percent decline in noninterest mortgage banking income in the quarter ended June 30, compared with a year earlier. Overall, its net income fell 6 percent. President and chief executive Joseph R. Ficalora said he had let go 65 workers because of the decline in refinancing, mostly in Ohio.

Jobs may be endangered

Marc Stone, a co-owner of privately held MCS Mortgage Bankers Inc., said his company, headquartered in Patchogue, has three other Long Island offices and more in 12 other states, in all employing 145 people. His refinancing business has fallen by 40 percent since June, and he said some of the jobs in other states where the company recently expanded might be endangered. "Refis used to be 40 percent of our business," he said, "so it hurts a lot."

Stone worried the rise in interest rates might ultimately reduce home sales. "Higher interest rates and higher home prices are not a good combination," he said. On Thursday, the National Association of Realtors said pending home sales slowed slightly in August -- a sign higher rates are starting to discourage buyers.

Some Long Island banks, credit unions and other lenders say they haven't had to lay off any personnel due to the end of the boom. Some said increases in new mortgages for home purchases -- as buyers rush before rates rise further -- and in home equity lines of credit and variable-rate mortgages are making up for much of the decline in refinance business.

McHugh of Continental said his refinance business has fallen by 40 percent this summer but lending for home purchases has grown. "So it's more than made up for our refinance losses," he said.

Bethpage's Kordeleski said he hasn't had to lay anyone off because his home equity lending business has risen as local real estate prices have recovered somewhat and consumers feel more confident.

To be sure, the total dollar value of mortgages in various stages of the approval process at Bethpage declined from $450 million on any given day in May to $150 million this month. His mortgages for home purchases have risen as prospective buyers on the sidelines rushed to lock in mortgages before rates rose further.

The bottom line, says Kordeleski, is that his total mortgage business is at about the level it was before the recession. "During the last four years we did record volumes of refinancings," he said.

At Teachers Federal Credit Union, president and chief executive Robert Allen said the total dollar value of mortgages seeking approval at his company has dropped by two-thirds. "The refinance business dropped like a rock," he said. "I hope to see the purchase [mortgage] market increase, but I don't see it making up for those kinds of volumes." He said, however, that the credit union has never had a layoff and doesn't envision any as a result of the refinancing decline.

Rising rate seen as a plus

Not all of the effects of the interest rate rise are bad. John Rizzo, the new chief economist of the Long Island Association, the region's largest business group, argued that rising interest rates are evidence of economic improvement. "The only way interest rates were going to continue to stay that low is if the economy continued to stagnate," he said.

Apple Bank for Savings' chief Alan Shamoon also said low interest rates provide a disincentive for consumers to save money and an incentive for individuals and businesses to borrow too much.

"I think that artificially low interest rates encourage excessive leveraging, which is a bad thing, by companies, individuals and households," said the chairman, president and chief executive of the privately held bank based in Manhasset. "Higher interest rates will encourage savings. We've had about five years of near-zero interest rates, and savers have been taking it on the chin."

Bethpage's Kordeleski said, "We're in a steadily improving economy, and . . . in the long run that increases jobs and the values of homes and improves the fundamental quality of life. But I think that the value the refis gave the marketplace did spur economic activity, and that's going to slow down a little."

Maura McDermott  contributed to this story

CORRECTION: An earlier version of this story misstated the number and location of layoffs by New York Community Bancorp.

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