Curve

Refinance now or wait in a very, very long line

Peter Miller
The Mortgage Reports contributor

You might be delaying your plans to apply for a refinance.

And that could be a mistake.

The time it takes to refinance is about to shoot up. Way up. Homeowners are refinancing in droves, which is taking lenders by surprise.

In December 2012 it took 57 days to close a refinance, according to mortgage software firm Ellie Mae. That’s nearly two full months.

In June 2019, before rates really started dropping, it took just 38 days to close a refi.

Why the big difference? Late-2012 saw the lowest mortgage rates ever, sparking a refinance boom. And the market is ripe once again for lowest-ever rates.

And considering it’s way more expensive to lock for 60 days than 30, it’s a wise time to apply and lock in your refinance.

Start your refinance application now. (Sep 16th, 2019)

Why lenders were surprised

In today’s world of AI and big data, closing a mortgage loan is still a surprisingly manual process.

Humans — yes, real humans — still need to review every file and make a judgment call on every piece of paper in the file — even if the “paper” is stored as a PDF in the lender’s database.

That intense human review wouldn’t be a problem if you had unlimited staff. But — oops — lenders laid off staff en masse in 2018.

Oops — lenders laid off staff en masse in 2018.

Lenders – like every business – want to control costs. If they expect to do less business they will reduce their workforce. Experts predicted that 2019 mortgage rates would top 5%.

Higher rates typically mean fewer originations so lenders began to cut back. Layoffs, mergers, and closures became routine. Lenders were set for a smaller future.

But then something strange happened. Instead of going up, 2019 mortgage rates went down. Way down. Many predictions were off by more than 2%.

Last week Freddie Mac reported that mortgage rates hit 3.55%. That’s not far from the 3.31% historic low set in 2012. When rates go down financing becomes more attractive. Black Knight estimated that with today’s rates 9.7 million borrowers are solid refinancing candidates.

For lenders, this turned out to be the worst of all worlds.

“Small and midsize U.S. mortgage firms,” said The Wall Street Journal in November, “are trimming staff, putting themselves up for sale and closing up shop at a clip not seen in years, a sign of the mounting pressure on the housing market as interest rates rise and a long economic expansion matures.”

Looks like lenders should have held out a few more months.

Fewer loan officers to help you

Industry changes can be seen with licensing statistics. The Conference of State Bank Supervisors reports there were less than 50,000 people who applied for mortgage loan officer licenses in the first quarter of 2018. A year later the number fell to 31,882.

In the first quarter of 2018 the Supervisors counted 107,386 licenses that were terminated. The first quarter of 2019 saw the number of terminations rose to 167,188.

In effect, fewer people are entering the mortgage loan business and fewer are staying. The army of loan officers waiting to help with your application is shrinking.

Lender finances getting squeezed

According to the Mortgage Bankers Association (MBA) the typical lending company originated 1,799 loans in the fourth quarter. That number fell to 1,571 loans in the first quarter, the latest available figure.

Lenders have a lot of fixed costs. When volume goes down the cost to originate each loan goes up. In the fourth quarter, the MBA reported that total mortgage production expenses — commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations – reached $8,611 per loan.

In the first quarter of this year things got worse. With less volume, average costs per loan increased to $9,299.

In the first quarter of this year things got worse. With less volume, average costs per loan increased to $9,299. The end result is that we have a lot of demand to refinance and fewer professionals to help with the process.

Is the loan application process really automated? No, really?

Automation has led to notable increases in processing speed and paperwork reduction. At the same time, mortgage loan officers remain necessary to assure that automation does not unfairly deny a loan to one person or create excess risk by approving a loan incorrectly.

Even with automation, there’s an ongoing need for manual reviews. The FHA, as one example, now requires manual reviews for cash-out refinance borrowers with low credit scores and high debt-to-income ratios. Some lenders use both automation and manual underwriting to assure good outcomes and less risk for all loans.

Strategies to refinance before wait times increase

For millions of Americans the time to refinance is now. However, there are two concerns.

First, you can’t know if refinancing makes sense without checking the numbers and speaking with mortgage loan officers. You need to know the latest rates and fees to make a good decision.

Second, an increase in refinance applications and a decline in loan officers and mortgage staff can slow the process.

To win in the new world of refinancing you have to plan ahead. If you think rates are low and not likely to go much lower, then lock-in a rate.

No less important, make sure your lock-in is long enough to cover application delays. A 30-day lock-in won’t work in a market where the typical refinance takes 38 days.

And, the longer wait times get, the longer your lock needs to be. You might tack on 0.125% to your rate by locking your loan for 60 days rather than 30.

For more information check online and see how today’s rates might lower your monthly mortgage costs. Given lower rates you might be pleasantly surprised.

Start your refinance before the line gets too long

No one likes to wait in line, but that’s just what millions of homeowners are choosing to do.

Get ahead of the crowd. Start your refinance and start saving money each month sooner rather than later.

Verify your new rate (Sep 16th, 2019)