US banks are having trouble handling a surge of mortgage applications spurred by dramatically lower interest rates, after record loan defaults and thousands of job cuts have stretched mortgage industry resources to the limit.
Applications for home loans more than doubled in the two weeks after the Federal Reserve said it would buy mortgage bonds to help stabilise the market, prompting mortgage rates to fall by more than three-quarters of a percentage point.
With average rates for a 30-year, fixed-rate mortgage now at about 5.2 per cent, growing numbers of borrowers have an incentive to refinance to bring down their mortgage costs.
But tighter underwriting standards for prospective borrowers, combined with funding and staffing difficulties for mortgage originators, are likely to restrict the supply of new mortgages.
“The mortgage industry is collectively unprepared to deal with a cascade of business; staffs were pared to the bone as the market for mortgages shrank over the past year,” analysts at HSH Associates wrote in a note to clients.
Mahesh Swaminathan, mortgage analyst at Credit Suisse, said that as a result, lower rates would not necessarily create a wave of mortgage refinancing on the scale that was seen in 2003, when credit markets were healthy.
“There is a lot of pipeline congestion. Originators don’t have the staffing or the credit lines to fund a lot of loans,” said Mr Swaminathan. “You have more due diligence which requires more staffing. It is not something that can be changed overnight.”
Part of the problem is that banks have directed the bulk of their manpower toward their servicing arms in a bid to stem the tide of mortgage defaults and foreclosures.
While banks have pledged to use capital they have received from the US Treasury to boost consumer lending, they are also under intense political pressure to modify loan terms for struggling borrowers. Loan modifications have continued to grow more quickly than other strategies such as subsidy programmes or refinancing into government loans, according to the Office of the Comptroller of the Currency.
The number of new loan modifications grew 16 per cent in the third quarter to more than 133,000, said the OCC. The rate of loan modification is likely to be even higher in fourth-quarter data, say analysts, as a result of recent initiatives by Fannie Mae and Freddie Mac, the two large mortgage financiers.