Banks brace for cool front on white hot market.

The white-hot refinance market is expected to be the first victim of a hike in interest rates, banking experts predicated this week.

"The overall delinquency rate is still relatively low, although we've recently seen personal bankruptcies start rising and seen FHA loan delinquency rates start to shoot up. These are indicators of potential problems with the market in terms of repayment," said Randy Anderson, William Newman chair of real estate at Baruch College's Zickland School of Business.

Just as the Feds are expected to ease the nation into higher interest rates with a series of small increases over coming months, banks are also being careful about how they approach the market.

But, using economic indicators learned over the past three decades, they are better able to forecast the future of the economy and no one is sounding alarm bells yet. "Banks are being very conservative," said Jordan Harris, vice president of Homebridge Mortgage Bankers, one of the fastest growing residential mortgage providers in the area.

We're not looking at the sky falling down right now and are not overly concerned about borrowers going bankrupt. But we are looking at growing our business conservatively." According to Harris, a lot of lenders got themselves into trouble in the '70s and '80s because they built up tremendous overheads through refinancing. This time around, they have been a lot more conservative as a result of economists warning about the direction interest rates are going and how to best plan.

As a result, the mortgage industry has already been busy edging up its own rates over the past few months, according to Michael Bizenov, president of Sterling National Mortgage, who said this should help dampen any impact from the expected Federal increase.

"What we often see in a market like this is that the mortgage rates have already gone up, mirroring more the 10-year Treasury [rate] and in anticipation of pending [Federal] rate increases," said Bizenov.

"There are those who believe that first layer of rate increase is helping to stimulate the [home buying] market."

The Mortgage Bankers Association--which expects $2.4 trillion mortgage originations this year--has said that a rising interest rate environment will cut into refinancings in 2004, but home purchases will remain strong.

MBA senior vice president and chief economist, Doug Duncan, said, "Our forecast has for some time anticipated that the Fed would wait until late this year before starting to raise short-term interest rates, but the growth of the economy has accelerated and raised the likelihood of a near-term rate increase."

MBA now projects that the 10-year Treasury rate will increase from 4.0 percent in the first quarter to 4.9 percent in the fourth quarter, averaging 4.5 percent for the year.

Mortgage rates will increase correspondingly with the average 30-year fixed mortgage rate increasing to 6.4 percent in the fourth quarter, from 5.6 percent in the first quarter.

The bankers believe the biggest impact of the impending Federal rate hike will be on the re-finance market where conforming borrowers--those with high credit scores and a lot of equity in their homes--are choosing not to refinance now while those with a lot of accumulated debt are.

That sub-prime market activity is what is worrying some mortgage bankers.

"There is the potential, as interest rates rise, of these people getting into credit issues and their ability to satisfy those mortgages may be compromised," said Harris.

"I don't believe that will happen quickly, but economists are projecting an increase in personal bankruptcy because of the amount of debt people have accumulated rather than the increase in rates, as we are still at the lowest levels ever."

Baruch's Professor Anderson, added, "A lot of people that have accepted adjustable rate mortgages or interest only loans now may become liquidity crunched.

"Traditionally, people borrowed 2.5 percent of their income but, with creative financing tools, people have been borrowing four to five times their income."

Anderson, however, does not expect the Feds will be too hasty in raising rates, explaining, "The Fed is being very measured in its response and I believe they will be more cautious than people think because they don't want to see house price correction as that would hurt spending and consumer spending is what has kept the economy afloat."

For the seasoned mortgage bankers used to the boom and bust cycles of the Fast 30 years, the coming months are unlikely to bring any big surprises.

"Their will be contraction in our industry--the companies that over-extended themselves, the young mortgage bankers who think these boom times are the norm, these people will contract and we will see some consolidation," predicted Bizenov, a 30-year veteran of the business.

"There will be a lot of pain [from] consolidation in the industry, but the healthy, well run companies will come out of this. The purchase-oriented companies that stayed with their core business stand a very good chance of doing well.

"But if the rates go up from a 45-year low to a 30-year low, it won't spell doom for the industry."