A Broker's Market.

Brokers are looking at the refi business as gravy that will turn 2001 from a good year into a great one. Many view the current boom as the reward for being a long-time originator--sticking with the business during good and bad times.

Wholesalers, meanwhile, are struggling with ways to prevent rapid refis from the same borrower.

What a difference a few months make.

A new refinance wave, triggered by the dip in interest rates, has loan originators scrambling to meet customer demand. Mortgage brokers, especially, are taking full advantage of the drop in rates and are busier than ever.

It's a far cry from last summer, when origination levels were off and many brokerage companies had to rein in expenses. "There was a great deal of tumult for brokers in the second half of 1999 and throughout 2000," says Tom LaMalfa, managing director of Wholesale Access, Shaker Heights, Ohio. Many brokers saw their revenues slow in response to lower production levels and were forced to lay people off and cut back on overtime, according to LaMalfa. "It's painful when it comes as abruptly as it did. In 1998 and the first part of 1999, brokers were adding people. Then they had to do a 180-degree turn when the market changed," LaMalfa says.

Now today's market has mortgage originators doing another about-face to keep up with the heavy demand for refinances. How are successful brokers and loan originators handling the rapid fluctuations in the mortgage market? It seems those who have been in the business for a while and learned to prosper in it share a common strategy during a refinance wave: They manage to maintain their purchase business along with its associated relationships and view the refinances as gravy.

Most originators interviewed for this article said they have changed their strategies and approach to the market very little despite the drop in rates and the refinance boom. Successful originators keep an emphasis on excellent customer service and maintaining contact with former customers and Realtor or other referral sources, even in a refinance market. Keeping up with refinance demand is a formidable task in itself.

In fact, many originators feel the biggest challenge strategically right now is determining how to take advantage of all the refinance opportunities. "Believe me, I'm so busy right now I can't even get to everybody," says Mike McGee, a mortgage broker with Winchester-McGee Financial in Sacramento, California.

"A lot depends on how hard you want to work and how you want to spend your time. Some brokers are working seven days a week, 14 hours a day," adds Al Pfannkuch, a broker with Priority Mortgage Group, Inc., Stratford, Connecticut.

Wholesale Access is very bullish on both overall origination activity and the share that mortgage brokers will take this year. The company is predicting refinances this year will be $500 billion, with the purchase market strong at about $900 billion.

"At these interest rates, or even at levels that are potentially better, there is going to be a groundswell of refinances," LaMalfa says. "There's more than a trillion dollars' worth of mortgages that have coupons above 8 percent, so if you talk about target markets out there, it couldn't be any plainer."

LaMalfa predicts brokers will take the majority of the refinance business this year. In 1998, mortgage brokers took 70 percent of the refinance market share, and 46 percent in 1999, according to market research done by Wholesale Access.

"Essentially the refinances went away and took the brokers with them," LaMalfa says. He predicts that brokers will account for 50 percent of overall mortgage activity in 2001 and an even larger percentage of refinance volume.

LaMalfa also predicts there will be a big increase in the total number of brokerage companies. Wholesale Access estimates there are between 20,000 and 25,000 brokerages operating today, and that number could increase by up to 10,000 this year. "There's a lot of small companies that can set up very quickly because there are few barriers to entry in the business," LaMalfa says. "There's that group that has been out there for 10 to 20 years, but the rest of it is a little bit like an accordion, and depending on the supply-demand balance in the mortgage market, the number increases as the demand for mortgages increases. So new companies will pop up."

Mortgage Banking spoke to a number of top brokers and loan officers who have been in the mortgage business for a while to see what strategies they are using to deal with the current market, and to find out how they adapt to the cyclical fluctuations in the demand for mortgages.

A good time to court Realtors

John Bianchi, an assistant vice president and San Diego County retail manager and top originator for North American Mortgage, says he will refinance his existing customers, but will not spend his time marketing new refinances. Instead, he believes the current market can be a strategic time to solidify Realtor relationships as well as create new contacts. That's because Realtors are often abandoned by lenders who are too busy working refinances, according to Bianchi.

"All the refi business will be extra business this year. I'm not going to let it go to someone else," Bianchi says. "But I'm not going to do the mailings and phone calls to the mass population just so I can get refis."

In fact, Bianchi doesn't do refinance loans personally, but has two originators in his office who work his database and do the refinance loans for past clients. "That way I don't lose any focus on the purchase business. I probably hit the Realtor business even harder than I did before. Most lenders who were calling on Realtors have now stopped calling because they can do refis. This is my chance to go out in the field and take [Realtors] away from loan officers who are not paying attention because they're working on their refis," Bianchi says.

Bianchi's origination volume in 2000 was just more than $93 million, up from $67 million in 1999--making him the No. 1 originator for North American nationwide, according to the company. He estimates that 5 percent of his originations last year were refinances. Bianchi predicts his production will surpass $100 million this year, with 20 percent coming from refinances. "My goal is to maintain the same level of purchase business, and the refinances will bring it over $100 million," he says.

As part of a new marketing strategy to real estate agents, Bianchi recently began offering to send refinance information to Realtors' clients. "If Realtors want to do a mailer, I'll work it for them. I suggest sending a letter to their clients notifying them that the [conforming Fannie Mae/Freddie Mac] loan limit has changed and that rates are down," Bianchi says. "We offer to do no-cost loans and also offer to throw in airline miles, and we mention who their Realtor was." Real estate agents are often grateful for the opportunity to put their name in front of clients, according to Bianchi.

Purchase business remains strong in Southern California, and housing prices continue to rise, says Bianchi. "I closed over $13 million in December in purchases, and January is going to be another great month. There's a real shortage of housing in San Diego and there are plenty of buyers. I think the lower rates are going to help the market, because a lot of people who were hesitant to sell their homes last year can move to a great fixed rate if they repurchase again. It's really going to boost the market."

Brokers have an edge

Neill Fendley, a mortgage broker in Phoenix, believes small mortgage brokerage firms have an edge over large mortgage companies in the current frenetic market. "Brokers offer personal contact to customers--that hands-on approach--as opposed to a large mortgage banker, where they're just another name and number on a loan," says Fendley, president of Pathfinder Mortgage, Phoenix, and the current president of the National Association of Mortgage Brokers (NAMB).

"It's a very personal form of service, and I think that's what makes us so valuable," Fendley says. He estimates that 90 percent of mortgage brokerages employ five or fewer people. "Frankly, I think the larger organizations have difficulty adjusting to a changing business environment. It's a little bit like the difference between turning a speedboat and turning the Titanic," Fendley says.

Successful brokers have the ability to stay fairly lean and change very quickly with the market demands, according to Fendley. "We hire some additional people here and there, but we don't say, 'This is going to last forever,' because the odds are it won't," he says.

Fendley's approach to the current market is a continuation of his overall business strategy to focus on purchase mortgages and Realtor relationships. "When we get into a market like this, of course we'll refinance our customers, but we make sure that we do not do it at the expense of purchase business with our longtime Realtors who have been giving us referrals for years and years," Fendley says. "I believe that's the difference between someone who can stay in the business and the companies who disappear overnight-the fly-by-night companies don't know how to do a purchase transaction."

Pathfinder's origination volume totaled about $100 million in 2000, 10 percent of which was refinances. Fendley predicts his company's volume should be up 30 to 35 percent this year if rates remain low, with refinances comprising 30 percent of total originations.

Pathfinder Mortgage has recently placed a major emphasis on the Hispanic market, which Fendley views as the fastest-growing first-time homeowner segment in America. "Arizona has a good economy, and we have a lot of people moving here. The lower rates are going to facilitate people buying homes," he says.

Pathfinder beefed up its telemarketing department within the last month to work on debt consolidation and refinance loans. "We're contacting all our previous clients, as well as soliciting targeted individuals who have higher interest rates who we've acquired through lists," Fendley says. He is cautious about hiring employees just for the current refinance boom. "We try to not overly expand-not hire a bunch of people we know we won't be able to keep. We make ourselves as efficient as we can in our internal operations and our electronic approvals. I don't like to hire people when I don't think they'll be able to stay with us," Fendley says.

It starts with customer satisfaction

Mike McGee, a mortgage broker in northern California, maintains that brokers don't need to change their strategy to suit a refinance market if they have been providing excellent customer service all along. McGee, president of Winchester-McGee Financial, Sacramento, California, is also president-elect of the California Association of Mortgage Brokers.

"I'm the best mortgage broker in this country-I've been doing this for 30 years, since I graduated from college, and I have the same basic marketing philosophy since I started in this business: It all starts with customer satisfaction," McGee says. No false modesty for this man.

"You do a good job for a customer-you tell them upfront exactly how it's going to happen and you follow up with them-and you've secured a client for life," says McGee.

There are now 20,000 names in McGee's customer database, and each one receives some form of direct mail a few times a year. For the last 15 years, McGee has also run periodic radio and television ads in which he speaks directly to the public. The response has been overwhelming.

McGee does a minimum of two loans a day, and in the current market it's usually refinance loans. "I can do three loans, but I leave one open for my real estate agents if they put a real estate deal together," he says.

McGee says he is not doing anything differently than he did six months ago. "Obviously, with the new technology there's a lot more competition in the marketplace, but I rarely get beat, pricewise, and I get the job done. My reputation precedes me," he says.

McGee used to have eight company locations and 150 people working for him, but a minor heart attack in the early s prompted him to reevaluate his hectic work schedule. "I went back to what I do best-one-on-one originating myself, and I love it. I'm making more money with less stress than I ever have," he says.

McGee has a support staff and four other brokers in his company, but the brokers operate independently, participating in overhead and taking 100 percent of the revenues from their own originations.

"If I really wanted to, I could bring in more people and quadruple my volume-but that puts me right back to where I was in the early 1990s which caused me the grief in the first place," McGee says.

McGee's personal volume was $35 million last year, 74 percent of which was purchase transactions. He predicts volume to be up significantly this year, with refinances comprising a greater portion of his volume.

A good deal of McGee's purchase business comes from Realtor contacts, but he is very selective about the Realtors with whom he will work. "The general real estate community does not quite understand the industry and that financing is the key to any real estate transaction. I have a short fuse with real estate agents if they come in and make demands to me. I'm a good guy. I'll get the borrower a great price. As far as I'm concerned, the focus of the deal is the lender. Until that concept is understood, I don't care whether I do any business with real estate agents," McGee says.

McGee adds, however, that he has a loyal following of about a dozen Realtors who feed him loan referrals on a regular basis. "They give me the lead; I close the deal. They have a customer for life; so do I. They leave me alone and let me do my job," McGee says. "I do work with real estate agents and I really appreciate the business that I get, but as far as me going out and soliciting the general real estate community, there's not a chance. All you really need are one or two good real estate agents and you'll do fine."

And McGee is very loyal to the Realtors he does work with. "I always feel my real estate business takes precedence over refinances. Real estate business will keep my doors open in the slow times," he says.

The best use of time

Priority Mortgage Group's Pfannkuch believes focusing on previous clients during a refinance boom is the way to go. "The question becomes how do you want to spend your time? Refinances take time. You can run an ad and the phone will ring. But you'll get the person who might be calling 10 different places, which means you have a 10 percent or so chance of getting their business," Pfannkuch says. "How much time do you want to spend explaining [refinances] to someone who might not even use you?"

When interest rates first began dipping, Pfannkuch started calling previous customers to let them know he could save them money or could reduce the time left on their loan. Priority often pays the borrower's closing costs on refinances, he says.

Pfannkuch is also preparing a mailing to all his customers, but won't send it all at once. "You also don't want everybody to call you in one day, so I stagger sending out letters," he says. Priority sends a newsletter out every three months to its client base as well.

Pfannkuch says he usually calls the best candidates for refinances first, and makes sure he is prepared with information specific to their situation when he calls. "I really want to look at their scenarios first and see what I can do for their individual situation," he says. "I don't want to just call and say 'You can save money, but I don't know how much.'"

Pfannkuch also believes it's important to keep a focus on purchase business and maintain relationships with key Realtors. He currently works with three core Realtors. "You never ignore your Realtors, but you have to balance your time," he says.

Priority currently employs three brokers, and Pfannkuch says the plan is to keep the company small. Priority is launching a Web site this year, which will be another easy source for refinances, according to Pfannkuch. If rates remain low in April and Pfannkuch has gotten through all his clients, he says he will then move on to marketing to new customers.

Pfannkuch points out that high housing prices in Connecticut have kept his company's income up, despite a slight slowdown in purchase transactions. "Our volume last year was down 20 percent in loans, but up 4 percent in commission income because of housing prices," he says.

In general, brokers will earn more on purchase transactions than on refinances, according to Pfannkuch. Priority's origination volume runs between $8 million to $15 million a year, but Pfannkuch predicts volume will reach $22 million in 2001. In 2000, 95 percent of Pfannkuch's originations came from purchase transactions. This year, he is aiming for 25 percent of his volume to come from refinances.

Pfannkuch says you have to manage your time wisely. "If someone is going to make you work for half a point, is it worth your time? If you can make a point to a point and a half and save the customer money, then it's worth it," he says.

Gravy time

Margie Hoffberg, a mortgage broker and vice president and co-owner of Residential Mortgage Center, Rockville, Maryland, views today's mortgage market as the time to reap the rewards for consistently providing excellent customer service over the years. "For someone who's been a loan officer as long as I have, it's your gravy time," she says. "It's a time for you to take advantage of the fact that you've been a good loan officer and that people like you, you've done a good job and your clients will refinance with you.

What makes the current refinance wave different from previous years is the use of technology, Hoffberg says. "We'll embrace what's out there and integrate technology a little bit more into the process to make things more efficient," she says.

In today's interest-rate market, savvy brokers will have a contact-management system in place to identify which clients should refinance, Hoffberg says. She is using a contact-management system by Microsoft[R] Outlook to organize clients by interest rate. "If you're smart, you send a mailing or you're proactive in calling clients. I've been calling, and the response is unbelievable. People are so grateful that you think enough of them to call them to refinance, and here it is, you're getting business," she says.

"Some customers may not be ready to refinance yet, but they will be if rates get to a certain point. You enter that into Microsoft Outlook with the proper interest rate, so every day if rates go down 1/8, you can look at it and see that you need to call certain clients," says Hoffberg. "It's something that I've always done, but I put it on many pieces of paper. It's just one example of using technology to make it easier and more efficient, and it really doesn't cost you anything."

The purchase market is starting to rebound again in Maryland, but Hoffberg's current focus is refinances. She does not work with Realtors, but instead forms relationships with financial affinity groups such as divorce attorneys, financial mediators, accountants and financial planners. Most important, Hoffberg says, is maintaining good relationships with the client base. "At a time like this, it really helps to be established in the business-I get a lot of referrals from clients," she says.

Most of the loans Hoffberg has done so far this year have been refinances, and business is unusually brisk. "Normally, in January and February we starve. December is usually a really slow month for applications because no one wants to make an application around the holidays. A normal December for me might be $3 million; this past December it was $6.5 million. So this is a time great for us," she says.

Consistent marketing

Joseph Falk, an independent mortgage broker in Miami and the president-elect of NAMB, agrees that keeping in contact with former customers is the best way to maintain a steady flow of business. "Consistent marketers will now reap the dividends of that effort," he says. "Even though the past year didn't show many rewards of marketing to former customers, if you were consistent, former customers will remember your name and come back. The phone is actually ringing--not so much off of new advertising, but a consistent strategy of maintaining contact with your client base."

Falk believes brokers are augmenting their marketing strategies to take advantage of the refinance boom through telemarketing and direct-mail campaigns. Falk doesn't believe telemarketing is cost-effective, and prefers keeping in contact with former clients through mailings.

Falk expects new brokers will pop up in the market, but probably not to the degree it's happened in the past. "We've had a sustained period of level interest rates, so it's kind of harder to jump back in than it's been in the past," he says. "But there will be an increase in mortgage-related jobs as this refinance market cycles through."

Companies are now adding on processors and appraisers and then will have to let them go when the cycle is over, according to Falk. "Most employees in the mortgage broker world are on commission, so when those commissions go down, it kind of takes care of itself. It's a flexible work force," he says.

Automated underwriting has lessened the need for additional staff. "Especially in a streamlined refinance market, automated underwriting has eliminated the need for appraisals and the processing requirements in some cases, Falk says.

Rapid refis and portfolio runoff 

While the refinance boom is great for loan originators, those funding and servicing loans face a different set of challenges. Automation has made it easier for originators to refinance the same customer multiple times--sometimes within a short time period. In response to that, wholesalers are implementing new policies or tightening enforcement of existing agreements with brokers.

"Companies are paying top dollar for the servicing asset; they don't want it to roll off the books in 90 days or 180 days, given the investment that they've made," says LaMalfa. "The servicers are really the ones that are at risk. To the extent they see their servicing assets run off, it creates a major problem because there will be impairments."

The longer the refinance wave lasts, the more at risk mortgage servicers become. Servicers have become more sophisticated in how they hedge their servicing portfolios, according to LaMalfa. "But there are still costs involved, because it isn't inexpensive to hedge those servicing portfolios. You're just mitigating and offsetting part of the risk, but the expenses are still there," he says.

Fresh refinance policies

The biggest challenge for some loan originators is complying with rules designed to prevent brokers and correspondents from refinancing the same customer multiple times, or churning loans. The "fresh refinance policies" implemented by wholesale lenders restrict originators from refinancing the same customer for anywhere from 90 days to one year.

And some loan originators are feeling the pinch. "We can't redo people as quickly as we used to," says Jim Pope, vice president of real estate lending at M&I Mortgage Corporation, Madison, Wisconsin. "The big mortgage companies where we get our fixed-rate money from have gotten wise to the refinancing every couple of months. We're restricted with some of our investors right now to up to a year.

"I'm extremely busy right now. We have all this business done in the 8 percent range and we're seeing business in the high 6s now," Pope says. With the fresh refinance policies set by investors, Pope says he is focusing on refinancing loans that he did more than a year ago, as well as on adjustable-rate mortgages (ARMs) that M&I funds itself and holds in portfolio, so are not subject to refinance restrictions.

Pope has been sending mailers out to highlight lower rates. "But right now we're just putting out the fire--it's a raging fire--of many people wanting to refinance, so we don't really need additional marketing," he says.

Last year Pope by himself originated $60 million, and he estimates that his volume will be about 575 million this year, with purchases remaining as strong as in 2000 and the additional volume coming from refinances. Pope closed $90 million in 1998, but he predicts this year will not be as strong because of the refinance restrictions. "I don't think it will be as good as 1998. If I could continually refinance these people I just closed on 90 days ago at 8 1/2 percent, I could do those all day long. I could pick up my log sheet and it's quick and easy--we've got some new tools now to expedite this process," he says. "But [refinance restrictions] are going to be a problem all year long."

Pope explains that the largest investor in M&I's mortgages imposes penalties if he refinances the same customer within four months. "After that, we have to increase the rate over our posted rate up to a quarter percent to get any income. We've got originators who are redoing the loans anyway and not making any money on it just to keep the client," he says.

"Some of my mortgage banking peers have signed a contract with a lot of these investors, but they don't always honor them because there are a lot of investors out there," says Pope. "They just shift the loan to another investor. But our investors are cross-checking what we're doing to make sure we're not cheating them." Some investors don't have any restrictions at all on repeat refinancing, according to Pope, but he expects that situation to change if the refinance market continues to remain hot.

M&I is currently negotiating with some of its investors to try to remove or change the refinance restrictions, Pope says.

Wholesalers' policies

Wholesalers are trying to do a better job of enforcing their policies on rapid refinances, according to LaMalfa. "They pretty much abdicated in 1998 in the last refi wave, and that comes at a great cost," he says. "Wholesalers tend to be very liberal-they usually cut brokers some extra amount of slack, but they don't want to get beat up or abused and make it just a one-way street," he says.

National City Mortgage Company, Miamisburg, Ohio, has a policy that there must be a period of 120 days after the initial closing before it will allow another refinance on the same loan, says Todd Householder, executive vice president of secondary marketing with National City. National City has the policy for two reasons, according to Householder: "There's a period of time before the loan is securitized and booked on the servicing portfolio, and the policy takes into account that time frame."

National City also has the refinance policy to prevent brokers or correspondents from taking advantage of less-sophisticated consumers, says Householder. "We always want to prevent an originator who finds a consumer with a high mortgage rate and doesn't refinance the consumer to the current market rate, but to a slightly lower rate than what they have. As soon as it closes, the originator turns around and refinances them again and charges them another origination fee," he says. "They'll sell them by saying, 'Since we did your refinance, rates have moved again and we can help you out again.' In fact, rates haven't really moved. They're just taking advantage of that consumer.

National City has always had the 120-day fresh refinance policy and does enforce it, Householder says. "Most of our brokers understand the policy and why we do it," he says.

On the other hand, Householder says National City will make exceptions to its 120-day policy if interest rates have decreased a good deal in a short period of time and a consumer could truly benefit. "We will work with our brokers and correspondents on a case-by-case basis, but 120 days is not that long of a time-so it truly is an exception," Householder says.

National City's origination volume in 2000 was $21.5 billion, with 45 percent coming through its wholesale channels, according to Householder. The bulk of National City's wholesale business comes from brokers, though the company does work with correspondents, too, Householder says.

Typically, refinances comprise about 15 percent of National City's overall volume. In December, refinances made up 30 percent of volume, and in January, Householder predicts, refinances will be 40 to 50 percent of volume.

Despite the risk of portfolio runoff, "it's still a good time to be in the wholesale business," Householder says. "The key there is, you're growing your servicing portfolio and being able to hedge that risk of prepayments."

No hard-and-fast rules

Other mortgage companies don't have specific time frames on how long a loan must be on the books before being refinanced, but continually monitor brokers and correspondents for potential abuses. Calabasas, California-based Countrywide Home Loans, Inc., doesn't have a firm or absolute policy on how long a loan has to be on the books before it can be refinanced, according to Rick Simon, spokesman for Countrywide. "We look for the loan to benefit the borrower and not just the originator and lender, as part of our constant scrutiny of potential abuses and deceptive practices. That becomes even more important when there's a refinance boom," Simon says. Countrywide won't make any loan that is for the benefit of the originator only, or that is based solely on the available equity in the property, according to Simon.

"We closely monitor any rapid refinancing in markets like this, particularly if the loan amount is increasing and the homeowner's equity is decreasing. In these cases, we really want to see a compelling benefit to the borrower. If there's a totally intangible benefit to the borrower, Countrywide will probably avoid the loan just to avoid the specter of equity stripping. If there's a compelling benefit to the borrower, we'll probably support the refinancing of the loan even if it's only been on our books for a short time," says Simon.

Countrywide continuously monitors its brokers' activities, and brokers work on an approval basis. "From a practical standpoint, I think it would be very difficult to find a compelling benefit to the borrower [to refinance] in less than 90 days," adds Simon.

"In the market we had a year ago, it was probably easier to monitor deceptive or abusive practices," says Simon. "In a high-volume refinancing market, there's probably more opportunity for those who want to engage in abusive practices to do it. So it does become more important."

Other wholesalers who previously did not have fresh refinance policies are now looking into it. Willie Newman, president of Ann Arbor, Michigan-based InterFirst Wholesale Mortgage Lending, is hesitant to use the word "churning," but says InterFirst is seeing rapid prepayments in today's market.

"Certain market areas and certain accounts are higher than others. The Midwest is an example of an area that's been high recently in prepays. We have seen some patterns with particular originators-they may do things when they refi like ratcheting down for an eighth of a point at a time, thereby collecting rather large premiums from wholesalers. It's actually kind of dissipated because there's so much business out there. People can do a legitimate business that's not necessarily churning," Newman says. We actually saw more of the churning last year, when some companies were in more dire financial straits."

InterFirst does not currently have a policy on rapid refinances or penalties for fast payoffs, but is researching it and at press time was very close to implementing one. "From my perspective, if the borrower is getting an economic benefit by refinancing, I really don't want to discourage that. That's what brokers and originators are there for, and that's what we're there for--to provide a service. On the other hand, if everyone else puts a policy in place, then all of a sudden we start getting negatively selected. That's a real danger for us," Newman says. "We've done a lot of research and we've found most players in the wholesale market do have some kind of early payoff policy with some kind of monetary penalty."

Newman believes InterFirst will be implementing a policy as well, but wasn't sure yet on the details. "One of the things we've found in our research is that enforcement is different depending on the player and the policy itself," he says.

Newman has seen time frames ranging from two to six months, with most rapid-refinance policies having a three- or four-month lockout period for a new refinance. "It's almost a philosophical challenge for me because I want to make sure the consumers get the benefit, but there are performance issues, and we certainly don't want investors [in the mortgages] to start treating mortgage-backed securities poorly--that doesn't help us at all," Newman says.

Addressing the issue of rapid prepayments "is a real challenge--especially in this environment," Newman says. "The industry is getting better and better at giving customers that economic advantage. While automation may not have expanded capacity infinitely, it's definitely made capacity more flexible."

Some wholesalers did have rapid-refinance policies during the refinance wave in 1998, but not as many as today, according to Newman. "It really wasn't talked about as much. It's come up on our radar screen very rapidly," he says.

A unique refi boom

The current refinance market has come on much more quickly than the 1998-to-1999 cycle, Newman says. "In the past, it would have taken three or four months for what's happened now in the last two or three weeks. Last week we received over double the amount of loan files that we got two weeks prior. That has never, ever, happened. This cycle is so quick that it just magnifies the effect of the prepays. People are seeing these applications rolling in and they're anticipating more prepays. They're responding to the violent nature of the cycle," he says.

Is this kind of market good for a wholesaler? "Certainly from a production perspective, no one can that positive is balanced by some of the negative pieces: You're going to get the roll-off real fast, and you've got people entering the business who probably aren't professional. Personally, I would prefer a more stable market," Newman says.

Broker business has been InterFirst's traditional strength, and the company is looking to expand it, according to Newman. "Because the capacity is bottlenecked no matter who you talk to, we're seeing brokers kind of flip-flopping around. They're trying to find the path of least resistance in getting their business done. We're getting a lot of new applications that might not be new businesses, but they're new to us if they think we can get things done a little bit quicker. That's another management challenge for us, because if we can retain those relationships and they're good, then that's great. But if it's kind of a three-month in-and-out, that doesn't work very well for us. There's a lot of challenges associated with this environment," Newman says.

A small number of bad apples

According to NAMB's Fendley, abusive practices do tend to be more prevalent during a refinance market. "Make no bones about it, we have some very bad apples out there--just like any other industry. There are brokers who engage in churning, flipping and equity stripping. It's unethical, immoral and not sanctioned by NAMB or by myself. It's a small number of bad apples, but it does exist. They prey on people's lack of information or sophistication," Fendley says. What some of the less-savvy consumers don't realize is that the equity in their house is being reduced every time they sign new loan papers, says Fendley.

"But it's not just brokers," Fendley adds. "There's a lot of retail banking operations [that] have some bad apples."

Wholesalers' policies on rapid refinancing vary widely, according to Fendley. "Some go up to a year, and some say you can't refi the same customer unless there is a significant savings to the customer. Some have prepayment penalties that are waived if the property is sold, but not if it's refinanced," he says.

It's likely that new brokers will pop up in a market like today's, Fendley says, but he believes the numbers will be smaller compared with the 1990s. "It's unfortunate--these aren't the true professionals, the people who jump on the bandwagon. They're just in it for a quick dollar. When the market returns to a traditional mortgage market, they'll disappear," he says.

Fendley says that NAMB is working with other industry associations and legislators to pass comprehensive mortgage reform to address some of the abuses that may be more prevalent in a heavy refinance market. "That will go a long way to eradicate those individuals who take advantage of borrowers," he says.

McGee echoes Fendley's feelings on new mortgage brokers who spring up overnight in a refinance market. "I've gone through a lot of cycles in this industry, and it happens consistently because it really doesn't take a rocket scientist to [become a mortgage broker]," says McGee. "People think they can make a quick buck, but they're not in for the long haul. We'll see every shoe salesman and photocopier salesman will, all of a sudden, be a mortgage broker, but come next year they'll all be gone," he says.

McGee says the brokers who are churning or flipping loans are usually the same brokers who pop in and out of the market. "If you're here for a long period of time, you're not going to jeopardize relationships with lenders to do some foolish things," he says.

"Most brokers don't want to jeopardize the gravy train that we're all on right now."

Mary McGarity is a freelance writer based in Trumbull, Connecticut.