Home refinancings a boost to bank and thrift industry

by R.W. Clever

 

 

The lowest interest rates in more than 40 years has probably been a bigger boon to homeowners than to business borrowers, while bring mixed blessings to the banking industry.

With 30-year, fixed-rate loans averaging about six percent nationally, many homeowners have refinanced one or more times, taking some of their equity in cash while reducing their monthly payments by hundreds of dollars a month.

The downside for the banks is that their mortgage portfolios are now worth less because of the lower interest payments. But that doesn’t seem to have hurt the banking industry too badly. In fact, if the results reported last year by the publicly traded banks and thrifts in the Pacific Northwest are any indication, 2002 was a very good year.

Jay Tejera, research director for Ragen McKenzie, told Puget Sound Business Journal last month that, despite the recession, Puget Sound area banks did well in 2002 and likely will do even better in 2003. For the 26 publicly traded banks and thrifts headquartered in the Pacific Northwest, the median earnings per share will swell 11.7 percent in 2003 over 2002, Tejera said.

“It’s pretty astonishing, given the economy and profit malaise everywhere else, but banks have held up quite well,” he told the Journal. “While losses have moved up with the cycle, they have not spiked the way they normally do for the vast majority of banks.”

Aside from the boost in home mortgage refinancing activity, the historic lows in interest rates has not had a correspondingly dramatic effect on overall loan activity. Businesses still borrow for the same reasons — to finance expansion, capital improvements and purchase new equipment.

But economic indicators have not been sending the kinds of positive signals upon which a business borrower might base a decision to assume new debt. And both business and personal customers are focusing more on savings.

“We haven’t seen the interest rate environment spurring people to take on new projects,” said Alice Takehara, manager of the Washington Mutual Business Banking Center in Burlington.

Takehara said that the sluggish economy has resulted in increased savings as businesses and individuals look to the “retention of cash.”

Moe Ludan, of Keybank, in Mount Vernon, said he doesn’t see “any perceptible trend on the business banking side. But, he added, “I’m optimistic this is going to be a better year.”

Andrea Martin, vice president and client manager at the Bank of America branch in downtown Mount Vernon, also notes that business lending has not been significantly up because of the interest rate drop. And the rates have not been a major factor affecting loan availability.

She said Bank of America and other financial institutions, because of the ailing economy, have tightened their lending practices to improve the quality of their loans and further reduce exposure to risk. Some business borrowers have refinanced their loans, but even the dramatic drop in interest rates has not spurred businesses to rush to their banks to borrow.

“I wouldn’t say that it’s caused businesses to go out and borrow money,” said Martin, of the lower rates.

For some business borrowers the lower rates have meant frustration. Back in the mid-to-late 1990s, Bank of America was one of the few lending institutions that could, because of its size, make long-term, fixed rate business loans. The usual term for a business loan is three to five years.

Martin said that when the rates began to drop in the mid-1990s, many business owners jumped at the opportunity to borrow at significantly reduced rates for a 15-year term.

The advantage at that time was that a business owner could know what his interest rates and payments would be for the next 15 years. But to get the lower rates, the business borrower had to agree to prepayment penalty should he pay off the loan earlier than the 15-year term.

“We have a number of borrowers who concluded that it was too costly to refinance their old loans, given the prepayment penalty,” said Martin.

The problem is compounded by the fact that under the formula for calculating the prepayment amount, the penalty actually increases as the gap between the original cost of funds and the current cost of funds increases.

“The spread causes the prepayment to get bigger,” said Martin.

Jim VanderMey, of Peoples Bank, said the interest rates were a great thing for the bank’s customers and, thus, for the bank.

“It’s had a tremendous effect on the volume of business we’ve been able to do,” he said, but added, “the downside is that the bank has been doing a lot of home loan refinancing, which has the effect of reducing the portfolio of higher interest loans.”

That said, VanderMey noted that a positive aspect of the reduced value in the mortgage portfolio is a reduced default rate because customers are better able to make their payments.

“If our customers are doing well, that’s good for us,” he said.