Spokane Journal of Business

Lenders adjust to refi decline

Drop in refinancings results in job cuts, refocus for banks

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-—Staff photo by Katie Ross
Tom Kuhn, branch manager here for Cherry Creek Mortgage Co., is hopeful that refinancing activity will pick back up in the future.

A weakening demand for home mortgage refinancing has caused some institutions here and across the country to cut jobs and refocus their attention on other areas of lending, such as home purchases, to fill the gap.

Bank of America cut 1,200 jobs last month because of the slowdown in refinancing, and is looking to cut another 2,800 jobs in the fourth quarter, says an article in the Oct. 25 edition of the Wall Street Journal. The article also says Wells Fargo & Co. has cut 6,200 jobs from its mortgage division, and Citigroup Inc. has slashed 1,100 jobs.

The Coeur d'Alene branch of Wells Fargo Home Mortgage has lost three employees due to the drop in refinancing, says branch manager Dirk Scott.

Spokane-based Sterling Bank also cut jobs last month in response to dwindling refinancing activity, says Debra Goodrich, executive vice president of home loan administration at Sterling. Goodrich declines to disclose the number of employees who were laid off, but says the home loan division of Sterling currently has about 540 employees.

Kelly McPhee, vice president and director of communications and public relations for AmericanWest Bank, of Spokane, says that bank hasn't had to lay off any employees due to a reduction in refinancing.

"It certainly has slowed down, but it continues to be good business," McPhee says.

At AmericanWest, she says, the average year-to-date percentage of mortgages is 60 percent home purchases and 40 percent refinancings. However, she says, in the third quarter, the bank saw an average of 70 percent purchases and 30 percent refinancings.

Spokane Teachers Credit Union, of Liberty Lake, also hasn't had to lay off any employees, says CEO Tom Johnson. Instead, he says, some employees in the mortgage division who were hired to handle the refinance boom have been reassigned to other areas of the credit union, such as loan services or branch operations.

"Staff reductions are typical in larger organizations; smaller ones redeploy," Johnson says.

According to Sterling's Goodrich, the decline in refinancings began last summer. Since the peak of the refinance boom in May, she says, the bank's refinancing and mortgage numbers have been dropping.

In the month of May, Goodrich says, Sterling took just under 2,000 mortgage applications. Of those, 56 percent were for refinancing. In the month of September, the bank had just over 1,100 applications, and 41percent of those were refinances.

Tom Kuhn, branch manager for the Spokane office of Colorado-based Cherry Creek Mortgage Co., says that companywide, about 64 percent of Cherry Creek's mortgage applications in the month of May involved purchases and about 36 percent were refinancings. For September, the company saw its purchases jump to about 79 percent of its overall business, and refinancings dropping to about 21 percent.

STCU has also seen a 10 percent to 15 percent drop in refinancing activity in the last few months, Johnson says, and an even larger drop over the course of the 2013 year.

"In the first half of the year, our mix of refinance to purchase was 65 percent refinance to 35 percent purchase," he says. "Now, those numbers have almost inverted."

However, it isn't just the decline in refinancings that is contributing to those numbers, Johnson says, noting that more people are making purchases.

The decline in refinancing activity is the result of climbing interest rates, Johnson says. Low rates open up the option of refinancing to more consumers by widening the gap between their current interest rate and the refinance rate, thereby offering an opportunity for bigger savings in monthly mortgage payments. When interest rates begin to rise, that gap narrows, and the number of people for whom refinancing makes financial sense shrinks. Currently, Johnson says, interest rates are around 4 percent for a 30-year fixed-rate mortgage. The lowest rate this year was around 3 percent, he says.

The climb in interest rates this year can be attributed to the Federal Reserve strategy called quantitative easing, Johnson and Kuhn both say.

QE is a program where the federal government uses money to buy mortgages and other securities from the market. It encourages lending by swapping liquid capital for the securities, thereby giving banks and credit unions more money to lend.

Kuhn says the Federal Reserve announced in May that it would begin tapering off QE in September, but reversed course once September came. Interest rates rose shortly thereafter. Kuhn says he believes the Federal Reserve won't taper the QE program until next year.

"Right now, rates are back to mid-June levels; not as good as May levels, but it's coming back down, which will spur on some more refis," he says.

Johnson also says that interest rates are higher now than three months ago because of the Federal Reserve's backpedal.

"We've already seen that it's going to be a challenge for the Fed to unwind this," Johnson says. "As soon as they indicated that they were planning to unwind it, that's what precipitated the steep climb in interest rates. I expect that they will unwind it; it's just a question of how and when."

To counter the reduction in refinancings, Johnson says, STCU is focusing on its other areas of lending, such as consumer and commercial loans. Overall, he says, the institution's year-to-date loan growth is 11 percent.

Wells Fargo Home Mortgage's Scott says that with refinancing numbers staying low, some lenders are turning their attention to the purchase market.

"As homeowner lenders we need to be focused on the purchase business," Scott says. "That's pretty much what banks have preached since day one."

Kuhn says that the focus should be on purchasers as well, and specifically on those who think they can't afford to buy a home, when in fact they can.

"There's a lot of misinformation out there about what is needed to buy a home," Kuhn contends. "It's still a good time to buy."

He says there are also people who aren't realizing their opportunities for refinancing, but it also depends on an individual's financial situation.

"It's still a good time to refinance if it makes sense for you," he says "There is no rule of thumb for refinancing anymore. You have to crunch the numbers for each person."

Kuhn also says he believes refinancing activity will pick up again.

"My opinion is that refis will pick up a little," he says. "Rates are starting to come back down a bit. And if interest rates are attractive enough, refis will be okay."

Johnson, who recalls interest rates being in the teens when he purchased his first home, also believes that refinancing at the current rate is still a good idea.

"Four percent is still a really attractive rate on a long-term basis," Johnson says.

Katie Ross
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Reporter Katie Ross covers manufacturing, hospitality, and government at the Journal of Business. An outdoor enthusiast and snowboard fanatic, Katie is a recent graduate of Gonzaga University.  

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