Land owners rush to refinance before home values fall farther; but other types of lending for real estate are curbed.

Land owners rush to refinance before home values fall farther

But other types of lending for real estate are curbed

Los Angeles County home and property owners, seizing upon lower interest rates and pulling out equity before property values fall further, are rushing to refinance their mortgages, the Business Journal has learned.

The dramatic upturn in mortgage refinancing comes at a time when local property lenders have pulled in the reins on other types of real estate lending.

Angelenos' rush to refinance, while not yet as frenzied as their rush in 1986-87, is providing local property owners with much-needed cash in the current economic slump, and simultaneously helping lenders to shore up otherwise depleted real estate loan portfolios.

"About 43 percent of our total (real estate loan) business will be refinance loans this year, compared to about 30 percent last year," said William Jucha, senior vice president of real estate lending administration for California Federal Bank.

On a countywide basis, refinancing loans comprise an even larger portion of total property lending.

Specifically, refinancing loans comprised 52.8 percent of total real estate lending in Los Angeles County during the first 11 months of 1990, and that percentage is expected to climb past 55 percent by year's end, sources estimated.

By comparison, refinancing loans comprised only 41.3 percent of the county's total property loan volume last year.

Behind Angelenos' rush to refinance are recent drops in interest rates, and that trend is expected to continue, sources predicted.

"We expect mortgage rates to continue coming down through the spring and summer (of 1991)," said Phillip Vincent, vice president and economist for First Interstate Bancorp. "If that pattern holds true, we could see overall mortgage rates dropping more than in 1986-87."

Interest rates did indeed plunge dramatically beginning in late 1986, when oil prices plummeted, causing inflation expectations to subside.

Inflation expectations, and not actual inflation, are a major determinant of long-term interest rates, including mortgage rates.

"We're seeing that same type of world situation today," insisted Vincent. "The Saudis have cranked out a lot of oil, which has more than made up for the loss of Kuwaiti and Iraqi oil. We have lots of oil piling up and that's going to reduce our inflation situation quite a bit."

Vincent went on to advise property owners to refinance immediately if they think war is imminent in the Middle East.

"If we go to war, you're going to see a dramatic shift to short-term, safe, liquid assets," he said. "And that will cause long-term rates, including mortgage rates, to go back up."

For the time being, however, interest rates are at their lowest level in years. That alone is sparking a surge in local refinancing loans.

Specifically, the volume of refinance loans in Los Angeles County jumped 25 percent in the first 11 months of this year, compared with the same period a year ago, according to Dataquick Information Network, which tracks real estate lending activity.

New purchase loans, on the other hand, have dropped more than 20 percent, and local construction loans are off more than 32 percent from a year ago, Dataquick reported.

And local lenders are anxious to recoup that drop-off in purchase and construction loans by scooping out a bigger share of the burgeoning refinance loan market, sources said.

"Lenders are looking into their own portfolios and to outside sources, as well, to identify borrowers with variable-rate loans or high-interest, fixed-rate loans," explained Jim Ewbanks, vice president of financial services for Dataquick. "Those borrowers, once identified, are being actively solicited to take out refinance loans."

Expectations that the price of Los Angeles County homes will continue to sink are also fueling the surge in refinancing loans, sources said.

"A few years ago, the much-higher prices of Los Angeles homes, relative to the rest of the country, limited our ability to package these (refinance) loans for resale into secondary markets," explained First Interstate's Vincent. "But the median price of homes here has lately been coming more in line with other parts of the country, which means they fit more easily into these pools."

One more factor that has given Angelenos the urge to refinance has been a recent drop in the closing costs being charged by local lenders.

Most lenders have recently reduced their "points," the up-front fee charged for making the loan, from 2 percent to 1.7 percent.

For example, 2 points on a $500,000 mortgage represents a $10,000 fee, while 1.7 points on the same size loan represents $8,500, or a savings of $1,500.