Goodbye Stopgap

Mortgage refinancings, the bread-and-butter of many a transaction broker through 2002 and early 2003, are declining, and that has many concerned.

They couldn't go down forever.

Interest rates, which declined to their lowest levels in nearly 50 years, are finally drifting upward. The 10-year Treasury bond, the benchmark of fixed-income yields, has risen nearly a full percentage point in the last month-and-a-half.

The change has multiple implications for the investing climate, but one thing is almost certain: Mortgage refinancings are going to drop.

On the face of it, this would seem of little significance to the average financial advisor, except that many have grown accustomed to using mortgage income to help offset the revenue shortfalls in other areas. The message these advisors should be hearing now? Find a new stopgap.

Overall, mortgage applications were down 7 percent on a year-over-year basis as of the first week of August, and refinancings were accounting for a shrinking portion of the overall application pool.

Brokers said this would impact their business in coming months. “We're not seeing the demand” for mortgage services anymore, says a rep at Ryan Beck & Co. He quickly added that things could be worse, rates-wise: “Thankfully, by historical standards we're still low, though.”

That much is true. Even with the recent movements (as of Aug. 12 the 10-year Treasury yield was 4.37 percent, up from a low of 3.10 percent on June 13; mortgage rates were hovering in the 6 percent range after dipping below 5 percent in May and June), rates remain attractive to many home buyers as evidenced by a strong mortgage originations market.

Nevertheless, from an advisor's perspective, mortgage originations are more complicated than refis and much harder to sell. As a result, a drop-off in refi volume has greater portent for them.

“With somebody who came to do a financial review, we, in the course of the review, could ask, ‘When was the last time you refi'ed? What's the rate? Why not refinance it?’” says one Merrill Lynch broker. He says he still has some refi volume in the pipeline, but most of it is from customers who locked in before rates started to climb.

Merrill has been particularly aggressive in getting brokers to embrace mortgages. The company did $21 billion in mortgages in 2002, which produced revenue of about $50 million, according to estimates by Citigroup analysts. About 62 percent of Merrill's sales force handles mortgages, and that figure should continue to rise as the company continues to emphasize integrated financial services, including banking. On the independent side, financial advisors affiliated with Lockwood Financial, now owned by Bank of New York, can now offer mortgages to their clients, too.

Analysts say the rise in interest rates will have a nominal effect of the earnings of Merrill and other brokerage houses.

“We do expect originations to decline, but the numbers are not big enough that we're overly concerned about it,” says Ruchi Madan, brokerage analyst at Citigroup.

He noted that the mortgage business has been profitable for brokerage houses, and he lauded the effort to “leverage their fixed-cost structures to generate new sources of revenues.”

And, though many advisors found the mortgage boom to be a nice fallback in an era where traditional investment revenue was harder to find, others are ready to say good riddance to the refi boom.

“What many advisors have found is that [quarterbacking a mortgage loan] is time-consuming,” says Michael Brizz, developer of the Referral Mastery System, a client-prospecting tool for advisors. “It's a new process for them — and frankly, you don't get paid very much for it.”

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