Rising interest rates have scared off some homebuyers and clamped a lid on refinancing -- while ushering in an era of cutthroat competition among mortgage lenders.
The amount of new loans is expected to drop by nearly a quarter this year, and another 5 percent in 1995, leaving lenders scrambling to stay afloat. Already, their volume has drained anywhere from 10 to 50 percent.
Some loan officers have opted to bail out of the business altogether, while several companies have been forced to lay off workers. And it's just a matter of time, many in the industry say, before lenders start closing their doors.
Just last week, the Prudential Home Mortgage Co. Inc. -- the nation's second-biggest mortgage lender -- said it would lay off 212 employees in Frederick because of a drop in refinancing business. And Countrywide Credit Industries Inc., the nation's largest mortgage bank, said it planned to cut 18 percent of its mortgage work force because the level of mortgage generation plunged by 23 percent in April, compared with the same month a year ago.
But for consumers who still can afford to buy a home, the shakeout could mean better deals. With business scarce, lenders have become more eager to accommodate buyers, for instance by requiring lower down payments or easing income guidelines.
'Fighting for every deal'
"Business is down right now, and people are fighting for every deal out there," said Rick Bell, a loan officer with Temple Inland. "When the rates were down, everyone got into the mortgage banking business. You'll see lot of lenders getting out because the market is drying up. The good loan officers that have Realtor and builder contacts, they'll survive."
A diminishing workload has forced Temple to lay off about 10 office workers in the Towson branch, including clerks and part-timers. Another lender, Columbia National Mortgage Corp. -- with offices in Columbia, Lutherville, Severna Park, Greenbelt and Rockville -- has laid off all the temporary workers hired to handle the refinancing rush, said Cindy Jones, company spokeswoman.
In some cases, "companies are laying people off because they specifically targeted refis," said Richard P. Cermak, sales manager of GMAC Mortgage's Severna Park office. "Usually the small brokers are the first to go, or those that only did refis. They've lost their rate advantage now. If rates rise, you'll see more cutbacks."
The state office of the Commissioner of Consumer Credit, which licenses mortgage companies, continues to see an increase in the number of lenders in Maryland, now about 1,770, said J. Steven Lovejoy, an assistant attorney general.
No companies have reported going out of business, other than Abbey Financial Corp., a Cambridge, Mass.-based mortgage banking firm with a branch in Bethesda. Abbey filed for bankruptcy protection April 1, suspending all loan activities and affecting an estimated 600 borrowers around the country. Others may have closed without reporting it to the state, Mr. Lovejoy said.
"At this point, we don't believe we've had a large number of business failures among mortgage lenders, but if interest rates continue to increase, we expect there will be more," he said.
Last year, mortgage loan originations for single-family homes totaled $1 trillion nationally, the Mortgage Bankers Association said. The group expects to see $770 billion worth of loans this year, a 23 percent drop, and about $700 billion in 1995. Refinancing business is expected to make up 28 percent of total JTC loan volume this year and 18 percent next year, compared to 40 percent during the 1991-1994 boom and 64 percent during the peak week of Sept. 10 last year.
"It's feast or famine in this business," said Patrick Cusack, a loan officer with PNC Mortgage Corp. "Everyone is afraid to buy, and the rise in interest rates has kicked out some people from qualifying. But in some cases, people are rushing in to purchase homes because they're afraid rates will go up even higher. People are out there looking and we're starting to get more calls from agents."
He said much of the remaining business has gone to state Community Development Administration programs, which offer low-interest loans for qualifying first-time homebuyers and recently increased the maximum mortgage from $88,000 to $110,000.
Chic Reid, president of the Maryland Mortgage Bankers Association, said he doesn't expect home sales to suffer in the long term.
"When interest rates take a dramatic rise, as they have in the last two weeks, people in the process of buying a home really go into sticker shock and sometimes don't come out for a while," he said. "We've seen buyers say, 'Oh God,' and step back, but that will pass. People will realize that 9 percent is not a bad interest rate."
"It's definitely going to shift the level at which people can afford new homes," said James M. Goryeb, vice president of Champion Mortgage Co. of Parsippany, N.J., which entered the Baltimore market last year. "How much it will impact sales is hard to say."
Finding a niche
To maintain and increase their share of the tighter market, lenders in the Baltimore metropolitan area have begun touting new products, stressing customer service and going after niche customers such as first-time homebuyers who might otherwise be cut out of the market by rising rates.
"As rates go up, you're going to see more innovative products to still help people achieve their main goal and buy a house," Mr. Cermak said. "More and more products will come about as a function of what's going on."
Mr. Reid predicts that adjustable-rate mortgages that allow buyers to get into homes at a lower rate will become more popular and that more people will turn to loans in which interest rates are temporarily bought down during the initial term of the loan.
GMAC offers company-held adjustable rate mortgages requiring only 3 percent down payments and more liberal underwriting, allowing buyers with lower incomes to qualify. Because of General Motors' backing, the company also can finance loans for properties that Fannie Mae and Freddie Mac ordinarily would reject as too risky, including outbuildings, condominiums, rural and resort properties, mobile homes and those with unusual floor plans.
To give buyers more leverage in negotiating home purchases, the lender also offers loan approvals within 48 hours, contingent upon an appraisal. GMAC also can lock in interest rates for nine months, which could help buyers waiting to sell their home or building a home. If rates drop by the time of settlement, the buyer would get the lower rate.
Countrywide offers a similar program, known as lock and shop, in which buyers can lock into a rate while they're shopping for a house, good for 30 days. If buyers sign a contract and rates have gone up, they're entitled to the lower rate, but if rates have dropped, they would get the lower rate.
At Temple Inland, buyers can qualify for loans based on good credit or with a large down payment, regardless of income. Another program finances 100 percent of the purchase price. With the seller and lender paying toward closing costs, a buyer could get into the house with as little as $700 to $1,000 down.