Refinancing boom slows as loan requests fall one-third from peak demand volume.

The home-loan refinancing boom is slowing down in the Southland.

Although there is still more demand for refinancing than before the boom began last winter, lenders report that requests for new loans are off by as much as a third since its peak.

"We don't think the refinance market is dead or the boom is over, but it has certainly slowed," said Sam Lyons, senior vice president of mortgage banking at Beverly Hills-based Great Western Bank.

There was an explosion in home-loan refinancing after the Federal Reserve Bank cut the discount rate last Dec. 20 to 3.5 percent, its lowest rate in 20 years. The discount rate is the interest rate the Fed charges on loans to banks.

Banks followed suit by lowering their interest rates, and for a time consumers were able to get 30-year, fixed-rate mortgages with interest rates of between 8 percent and 8.5 percent.

But the surge of refinancing set the stage for interest rates to go up, noted Doug Perry, vice president of loan production at Pasadena-based Countrywide Funding Corp. Lenders sold their abundant supply of refinance loans to Freddie Mac, Fannie Mae and Ginnie Mae, which, in turn, packaged the loans to create mortgage-backed securities that were sold on Wall Street, he said.

This oversupply of mortgage-backed securities combined with a rather high level of treasury bonds on the market gave investors too many choices, and interest rates started to rise in mid-January, Perry said. Lender interest rates now range between 9 percent and 9.25 percent.

"Nine percent is a psychological barrier," Lyons said. Consumers see that interest rate and "decide to sit out" and refrain from refinancing their home loans, he explained.

Many Southland homeowners already have first mortgages with fixed rates of 9 percent, and were looking to refinance when interest rates fell to 8 percent. But now there isn't any incentive for these homeowners to refinance, Lyons noted.

At Countrywide Funding, for example, the number of requests for loan refinancing is off 33 percent from the peak during mid-January, said Sidney Lenz, executive vice president of Countrywide. The average amount of a refinancing loan at Countrywide is $125,000.

The shift in the real estate lending market is not just away from refinance loans, but also toward more loans for actual home purchases, lenders noted.

During January, 80 percent of all home loans made in the state by San Francisco-based Bank of America were for refinancing. That figure has now shrunk to 50 percent, with the other 50 percent being loans for home purchases, said spokesman Richard Beebe.

Likewise, refinance loans at Great Western made up 80 percent of all home loans issued by the bank in January, but now make up only 65 percent, Lyons said.

Lenders said the shift is the result both of higher interest rates that are discouraging consumers from refinancing and the surge of activity in home sales.

Spring is typically a time when consumers are more interested in buying homes, Beebe said.

Refinancing activity may have slowed a bit, but it's still going strong, and consumers looking to refinance are wandering away from the 30-year, fixed-rate loans they have customarily been choosing, Lenz said. Instead, they are opting for adjustable-rate mortgages and balloon mortgages, he said.

The starting interest rates for balloon mortgages and adjustable-rate mortgages are much lower than the current interest rates for fixed-rate refinance loans, Perry said.

Meanwhile, when the refinancing boom hit its peak a few months ago, Bank of America began charging applicants fees. The purpose was to give the applicants an incentive to complete the loan application process, and to cut down on the number of applicants, Beebe said.

If the applicant completes the loan process, the fee is applied toward the closing costs of the loan. But if the applicant decides not to take out a loan with the bank, Bank of America keeps the fee, Beebe said.

The fee is 1.5 percent of the loan amount applied for, up to a maximum of $3,000. And although the demand for refinance loans at the bank has dropped dramatically, Bank of America has not yet rescinded the fee, Beebe added.

In general, lenders would like to see the number of home-purchase loan transactions pick up to take up the slack that refinance loans will leave after all of those pending are processed, said Pete Mills, director of government relations for the California Mortgage Bankers Association.

Although the number of home purchases in California is increasing, it is not enough to make up for the decrease in refinance activity, Mills added.