With interest rates near historic lows, Connecticut banks and mortgage lenders are seeing a surge in refinance activity, which will likely mean a boost to their bottom lines and more cash flow in the local economy.
“Overall activity is up across the board,” said Bruce Ocko, director of New England Home Lending at Citizens Bank. “There is definitely a surge.”
Ocko said mortgage application volume at the bank is up 130 percent for the first quarter and the majority of the applications — almost 80 percent — are for mortgage refinancing.
The bank is bringing in additional personnel to its Connecticut offices to meet the demand, Ocko said.
Waterbury-based Webster Bank is seeing similar activity.
“Borrowers are calling us,” said David Birulin, senior vice president of sales and marketing at Webster Bank’s lending division. “Our refinance business is more than double what we were doing last year.”
Local bankers said tumbling interest rates have driven much of the recent refinance activity. The national average rate for 30-year-fixed mortgages has fallen below 5 percent in recent months thanks to aggressive measures taken by President Obama and the Federal Reserve.
Ocko said most customers looking to refinance currently have higher interest 30-year-fixed-rate mortgages and are looking to shift into the much lower rates that are currently available.
Those extra funds should help spur the local economy because people will have more money to spend, Ocko said.
The increase in business is also adding much needed help to bank’s bottom lines. The combined profits for all of Connecticut’s 58 federally chartered banks plummeted 94 percent in 2008, to $30 million from $527 million a year earlier, according to the Federal Deposit Insurance Corp.
The recent refinance boom will allow banks to collect hefty mortgage fee revenue and bolster their mortgage portfolios by allowing them to add new customers.
The impact of this new business could be significant.
Stamford-based Luxury Mortgage, for example, implemented a hiring freeze toward the end of last year due to the repercussions of the financial crisis. But business has picked up tremendously in recent months. Luxury Mortgage has seen a 300 percent increase in mortgage production, CEO David Adamo said.
That’s allowed the company to end its hiring freeze and aggressively grow its staff by about 50 percent since last November.
Meanwhile, the Mortgage Bankers Association increased its forecast of mortgage originations in 2009 by over $800 billion. MBA now expects originations to total $2.78 trillion, which would make 2009 the fourth highest originations year on record.
But, while the refinancing boom will be a boost to their bottom line, it will also force banks, especially smaller community ones, to keep a closer watch over their loan portfolios. That’s because writing too many low interest rate loans could put a squeeze on their future viability.
About 80 to 85 percent of a community bank’s operating revenue typically comes from its net interest margin, which is the difference between the money a bank gains from interest on loans and the money it pays out as interest on deposits.
Local bankers are concerned that enormous federal government spending to boost the ailing economy will lead to inflation, which will cause interest rates to go up drastically in the next two or three years.
In a rising rate environment, a bank’s cost of funds — basically, the rates paid to attract deposits — goes up as the interest income on their portfolio of fixed-rate mortgages remains flat, thus reducing their revenue generating ability.
“That would put a tremendous squeeze on profits,” said Christopher Davis, a director at HFM Wealth Management in Hartford.
The Hartford Business Journal reported in January that some local banks were going to begin selling their residential mortgage loans into the secondary market for the first time in their history because of that threat.
The current refinance boom will likely increase that trend, Davis said.
“Banks really have no choice,” he said.
Greg Bordonaro is a Hartford Business Journal staff writer.
