Saturday, October 08, 2005
Still More Hissing Sound: The Times Page A1 Story Of Doom!
by Tom Bozzo
The problem is that the mortgage market from which these firms rake their earnings is highly volatile. For instance, the volume of originations more than doubled from 1990 to 1993, fell by 37% from '93 to '95, soared 159% to another peak in '98, then fell 31% to a 2000 trough before taking off with the real estate boom fueled by the punch whose bowl the killjoy Fed is taking away with increasing seriousness.
In fact, the more volatile refinancing business has already dropped precipitously. On July 16, 2003, the Mortgage Bankers Association's refinancing activity index stood at 6,657.2 (the base is March 16, 1990 = 100). The refinancing volume that year, just over $2.5 trillion, was almost the size of the entire mortgage market as reported by the Times. The latest report, from October 5, puts the index at 2107.4, suggesting refis have dropped off by 2/3.
How low can it go? When we closed on our first house, in May 2000, the average rate on a 30-year fixed rate mortgage was 8.64% (vs. 5.94% now) — even the average 1-year ARM rate was 7.56% (vs. 5.13% now and 3.1% in July '03). The MBA refi index that week was 340.6, 84% lower than now and down 95% from the peak.
Will rates get that high again? Hopefully not, but who knows? The thing is, they don't have to get that much higher to put a further hurt on the refi market, not to mention the purchase market. Whatever, it's likely that lots of the real estate middlemen will become unemployed. Or, in the case of the marginal real estate agents, remain technically employed but without the benefit of steady income.
On the front page of the Times this morning (if below the fold), Jeff Bailey describes the enormous growth of the industry of mortgage middlemen. Here's the lede...
New York Times: With Mortgages, Instant Wealth For Middlemen: A vast industry of real estate middlemen has sprouted recently, riding the ups and downs of the mortgage market, and in many cases, accumulating great wealth in the process.My immediate thought: This story could hardly be farther behind the curve, like a bottom-of-A1 story from February 2000 on the explosive growth of the telecom switching industry. Sell!! We hope that the photogenic Illinoisians depicted with the story have been diligent savers through these boom years.
Mortgage brokers, virtually nonexistent 25 years ago, now number 400,000 workers at more than 50,000 firms. They are scrappy entrepreneurs and sales representatives who match up borrowers and lenders on roughly 7 out of 10 mortgages. This year, they will collect some $33 billion from their share of an estimated $2.8 trillion in home mortgages.
The problem is that the mortgage market from which these firms rake their earnings is highly volatile. For instance, the volume of originations more than doubled from 1990 to 1993, fell by 37% from '93 to '95, soared 159% to another peak in '98, then fell 31% to a 2000 trough before taking off with the real estate boom fueled by the punch whose bowl the killjoy Fed is taking away with increasing seriousness.
In fact, the more volatile refinancing business has already dropped precipitously. On July 16, 2003, the Mortgage Bankers Association's refinancing activity index stood at 6,657.2 (the base is March 16, 1990 = 100). The refinancing volume that year, just over $2.5 trillion, was almost the size of the entire mortgage market as reported by the Times. The latest report, from October 5, puts the index at 2107.4, suggesting refis have dropped off by 2/3.
How low can it go? When we closed on our first house, in May 2000, the average rate on a 30-year fixed rate mortgage was 8.64% (vs. 5.94% now) — even the average 1-year ARM rate was 7.56% (vs. 5.13% now and 3.1% in July '03). The MBA refi index that week was 340.6, 84% lower than now and down 95% from the peak.
Will rates get that high again? Hopefully not, but who knows? The thing is, they don't have to get that much higher to put a further hurt on the refi market, not to mention the purchase market. Whatever, it's likely that lots of the real estate middlemen will become unemployed. Or, in the case of the marginal real estate agents, remain technically employed but without the benefit of steady income.
