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Mortgage Refinancing > Surge In Mortgage Refinancing To Begin In Late 2005 And Peak In 2007 And 2008
Surge In Mortgage Refinancing To Begin In Late 2005 And Peak In 2007 And 2008 |
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It was expected that the first years of this decade should have seen ebb for the lending business, as a trough was
anticipated between the huge wave of underwriting during the mid- to late-1990s and the mortgage refinancing that would naturally occur a decade later. However, the actual position has been pleasantly different for the mortgage refinancing industry as 2003 brought a record year in U.S. commercial real estate lending, with originations hitting $116 billion, the first time originations topped $100 billion and a huge, 34% jump from the $86.4 billion reported for all of 2002. 2004 statistics are expected to surpass those of 2003 (the record year) in terms of mortgage refinancing. Through September, originations tallied $88.2 billion, up from $78.1 billion for the first nine months of 2003. The third quarter was particularly productive--MBA members originated $34.1 billion in loans, a 15.2% jump over the same period a year earlier. Ross Berman, president and CEO of Chicago-based iCap Realty Advisors, feels that ordinarily the present years should have been slower but loan originations for his company have jumped by 28% in 2003 to $3.6 billion and are expected to exceed that amount in 2004. Robert Feller, CEO of GMAC Commercial Mortgage Corp., says "The volume of mortgage refinancing that has occurred in 2004 would not have been forecast based on loan servicing." He was referring to the number of loans reaching maturity and in need of new financing. The total origination volume for 2004 was expected to surpass $20 billion, similar to 2003 and Feller predicts that there will be an increase of 10% in 2005 for the company's originations. Market Drivers There are several reasons for this happy anomaly in mortgage refinancing industry. Although low interest rates continue to be a borrower's best friend, there are other reasons as well, such as the continuous inflow of capital into commercial real estate, which is looked on as a favorable alternative to other fixed-return investments. Mary O'Rourke, senior director of New York-based Fitch Ratings says that, "Real estate has really outperformed across the board, and adds that "It has performed better than the stock market, and real estate bonds have performed better than corporate bonds, for example." It has been reported that commercial mortgage-backed securities from 1990-2003 had an overall cumulative default rate of only 0.2%, compared with an 11% default rate for corporate bonds during the same period. The hectic pace of investment sales activity is also boosting loan originations. Real Capital Analytics, which tracks deals $5 million and higher, states that the estimated value of sales transactions in 2004 ranged between $160 billion and $170 billion, an increase of more than 30% over the $120 billion recorded in 2003. Bob White, President of Real Capital Analytics, predicts that the beginning of 2005 is going to start with a bang as far as sales momentum is concerned. Property purchases are expected to form a major part of the business of mortgage-refinancing bankers in 2005. CEO Ed Padilla of NorthMarq Capital says that acquisitions and new development accounted for 25% of his company's mortgage banking business over the past two years and he anticipates that activity to account for fully one-third of the Bloomington, Minn.-based firm's origination volume in 2005. A slew of loans made in the 1990s are reaching maturity. Mortgage bankers expect a cycle of mortgage refinancing to begin in late 2005 and peak in 2007 and 2008. Many borrowers are still sitting on 10-year loans that, in some cases, carry interest rates that are twice as high as today's rates. As the prepayment penalties can be expensive, most borrowers have not refinanced. Records show interest rates on 10-year loans averaged 8.17% in 1997 and 7.56% in 1998, compared with a current rate of 6.66%. Some pension funds and life insurance companies are eager to retain the better loans in their portfolios although the euphoria of maturing loans coming due won't occur until 2007. Lenders may, therefore, offer mortgage refinancing, extending discounts on the prepayment penalties or rolling the make-whole payments into a new loan. |
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