Mortgage refinancing using a home equity loan

For the past few years the meat and potatoes for bankers has been refinancing home mortgages, lucrative little transactions that generate sweet fees for the bank.

But refinancing plummeted in 2004. The reasons? Interest rates have bumped up a bit from their rock-bottom levels, and there simply aren't that many homeowners left who haven't already refinanced.

"All those folks that were refinancing have done it--some two or three times," says Danny Montelaro, president of Regions Bank for Central Louisiana.

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In 2003, Montelaro's area refinanced $250 million in loans, but last year that figure dropped to $160 million. Nationwide, refinancing represented as much as 60% of loans in 2003, but it is closer to 30%.

The next big thing, some bankers say, is homeowners getting loans and lines of credit secured by the equity in their homes, which is particularly attractive for those who've seen their property values climb. That lending isn't nearly as lucrative for banks, but does represent a growing source of income to help offset the drastic drops in refinance fees virtually every bank will experience this year.

The Federal Deposit Insurance Corp. reports that home equity lending accounted for 25% of growth in mortgage debt toward the end of 2004. "Louisiana consumers appear to be substituting home equity loans for traditional consumer loans to support their borrowing needs," the FDIC notes in its latest seasonal economic profile of the state.

At Regions Bank, equity lending totaled $51 million in 2003, then climbed to $72 million last year.

"I think the bulk of those loans are people coming in to consolidate debts, reduce their rates and to take advantage of tax savings from deduction of interest on home equity lines," Montelaro said.

For now, it's a borrower's market. Hibernia's home equity incentives include 2.9% introductory rates for six months, then a fixed rate of prime for borrowers with the best credit scores, says Craig Peak, the bank's vice president of consumer credit. Customers get a low rate plus the advantage of writing off the interest on their taxes. Likewise, Regions is dangling an introductory rate of 2.9% for four months, with prime rate following that for those with good credit.

"Back in late 2003 and early 2004, it was clear as a bell that mortgage volume was dropping like a rock, so we doubled up our efforts to promote home equity lines," Montelaro says. "That's not to say we shied away from mortgage loans, but we've had to work twice as hard to pull the volume we did in 2004 versus 2003."

Even if home equity lending spikes, bankers will not enjoy the same riches they did during the refinancing boom. Refinanced loans typically generate far more fees for a bank. With home equity lines, banks often actually absorb many of the costs, such as appraisals.

While some banks report healthy gains and even healthier predictions for home equity lending, the mortgage business did not dry up and blow away. Some bankers are still bullish on the mortgage market.

"The general feeling out there is refinancings are behind us. That's just not so," says Paul Peters, president of Hibernia Mortgage. "That's why our refinance volume is still at fairly high levels."

Peters points out that interest rates remain barely above their 45-year historic lows, which is fueling bread-and-butter mortgage loans for home sales and new homes.

"Consequently we're still getting a considerable share of refinance volume," Peters says. "There are still a considerable number of people refinancing for different reasons other than to reduce their monthly payment or the loan term."

Anticipating rising interest rates, some homeowners are refinancing to dump their adjustable-rate mortgages and to lock into fixed-rate ones.

"They feel like they don't want to take a chance when their ARM rate does mature and rolls up to something too high to afford," Peters says.

And Bank One has a new option for refinancing for homeowners who want to avoid paying personal mortgage insurance, a fee borrowers are required to pay until they have 20% equity. Bank One's "easy refi" also lets the borrower avoid fees associated with traditional loan refinancing.

In its easy refi--which is typically approved the same day--Bank One pays off the original mortgage and becomes the first position lien holder. The homeowner then repays the easy refi loan to Bank One, minus PMI, which is no longer required, says Don Barnes, market manager for Bank One's Central and South Louisiana branches.

The application fee is $75, and closing is typically $250. "We've been offering it for a year, but we're starting to market it more," Barnes notes.

Still, the trend seems to be toward fewer refinancings and more home equity lending. Banks are suggesting equity credit lines for customers who may not need cash now but want to lock in low interest rates for money they will draw from that credit line later.

In a way, home equity loans and credit lines are replacing credit cards and other personal lines, says Peter Gwaltney, chief executive officer of the Louisiana Bankers Association.

"What people are doing is using them for is to finance cars, home improvement and other consumer spending, things they previously financed with personal lines or credit cards," he says, noting the obvious advantage of being able to deduct the interest from federal taxes.

"Growth in home values nationwide and in Louisiana has made home equity lines an attractive vehicle to make big purchases," Gwaltney says. "We're on the tail end of the refinancing wave, and I think the home equity loan is going to be a hot product for the near term and for quite some time to come."

35%

2004 increase in home equity lending.

TOM GUARISCO covers telecommunications and utilities, retail, oil and gas, and insurance. Reach him at tguarisco@businessreport.com.