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Lenders stretch as rates rise

With requests for refinances dwindling, it takes some creativity to attract new loan customers.

October 26, 2003|Diane Wedner | Times Staff Writer

Mortgage rates are expected to climb to 6.5% next year, but the good news is that home buyers are likely to find an abundance of new loan products that will help to keep them in the market.

The end of the refinancing boom is spurring both small lenders and the biggest players to try to attract new customers, particularly reluctant home purchasers, who typically hesitate as interest rates rise.

Since mortgage rates started to rise in late June, refinancing applications have been declining, dropping to their lowest level last week since the end of August. Refinancings, which will account for about 66% of all loan originations this year, will fall to 28% in 2004, Doug Duncan, chief economist for the Mortgage Bankers Assn., said at the group's annual conference last week in San Diego. Countrywide Financial Corp., the nation's largest independent mortgage lender, saw refi volume shrink 47% to $20.4 million in September, down from $38.5 million in July, coinciding with a rise in interest rates.

So lenders are having to court new customers. They are coming up with a variety of adjustable-rate mortgages, innovative construction loans and other products. They're also now willing to take the time to help credit-challenged buyers, even those who have filed for bankruptcy, qualify for a loan, said Mark Shenkman, president of Priority Financial Network in Calabasas.

"New programs are being dusted off and re-promoted," said Thomas Meyer, president of Homebuilders Financial Network. "The challenge is for lenders to keep home buying affordable."

In Eagle Rock, Coldwell Banker broker David Toyama said the increase in interest rates has brought in more customers who are eager to close a deal before rates climb again.

Even with interest rates still hovering near 40-year lows, the recent uptick in rates makes buying more expensive, and especially difficult for many first-time and trade-up buyers in the region's superheated market.

For example, a buyer wanting to purchase a home priced at $336,000 in June, when rates were about 5%, would have faced a monthly payment of $1,623, based on a 30-year, fixed-rate loan with one point and a 10% down payment.

If that buyer had held off just two months, when rates climbed in August to about 6%, the monthly payments on that same house would have risen $190 to $1,813, adding $2,280 in costs over a year and nearly $23,000 over 10 years.

"For a first-time buyer who's stretching to get into the market, that's a big deal," said David Soleymani, managing director of First Capital Mortgage in Santa Monica. He added that when first-time buyers get squeezed out of the market, it has a ripple effect up the ladder. Move-up buyers can't sell their homes, so they don't buy the more expensive homes.

Adding to that frustration is the continual rise in home prices. Median sales prices of new and existing Southern California homes and condos in September soared 20% from a year earlier, to $335,000, according to DataQuick Information Systems. The median price in Los Angeles County was $336,000, up 25% from a year ago. Orange County was up 17%, to $431,000, over a year ago.

To keep buyers in the market, lenders are offering a variety of adjustable-rate loans. Toyama's client, for example, got a loan last week that is fixed at 4.65% for five years, then becomes adjustable. Lenders tout these "hybrid" loans for first-time buyers who plan to move up in five years. The rates are significantly lower than those of 30-year fixed mortgages.

Countrywide is offering a program to qualified new-home buyers that guarantees an interest rate while the home is under construction -- up to 14 months from the date of the loan application.

Other lenders are expanding programs targeted to the special needs of immigrant first-time home buyers, who may not qualify under conventional electronic credit scoring systems.

Borrowers seeking bargain-basement rates should be wary of products that sound too good to be true, warned Meyer of Homebuilders Financial. Some smaller lenders, trying to avoid shuttering their businesses in this post-refi period, may offer loans they cannot deliver.

Meyer suggests that borrowers who apply to smaller lenders touting the lowest rates also should apply to larger companies, which may charge a little more but will be around during the slower periods.

With home sales expected to continue strong and with interest rates going up, consumers will have to be even more savvy about financing.

In mid-June, the average 30-year fixed-rate mortgage with one point hit a low of 5.17% in Southern California. That rate was 5.79% last week and 6.15% a year ago, said Earl Peattie, vice president of National Financial News Services, which tracks such data. Sales in the region, which rose 25% in September, are expected to be brisk as long as rates stay below 8%.

"Eight percent seems to be the psychological barrier at which we might see a softening of the market," Peattie said. "That's when buying might slow down."

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