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Mortgage Banking’s Pot Of Gold

Spurred by lower interest rates and a large demand for housing, 2001 could be a record year for the local mortgage industry, with originations expected to top $6 billion.


April 12, 2001
Copyright © 2001 CARIBBEAN BUSINESS. All Rights Reserved.

Mortgage loan bonanza: As consumers take advantage of lower interest rates to buy or refinance their homes, mortgage institutions fight for their share of the island’s mortgage origination market.

Just as the economy feels the first serious slowdown of its nine year-old economic expansion, local mortgage banks are having a field day. Demand for housing continues at an all-time high as consumers rush to take advantage of lower interest rates and better mortgage product offerings.

After increasing the federal funds rate–the interest rate banks charge each other on overnight loans–on three occasions during the first half of 2000, Federal Reserve Chairman Alan Greenspan’s anti-recession move to reduce the rate this year by 100 basis points in January and another 50 basis points in March was the shot in the arm the economy, consumers, and the mortgage industry were looking for.

2001: record-breaking year

Based on business generated during the first three months of 2001, industry sources predict the local mortgage lending market could surpass the $6 billion mark by the end of this year if current favorable market conditions remain.

In the last few years, the Puerto Rico mortgage market has been growing at a much faster pace than the island’s economy and all other banking sectors. According to the office of the Commissioner of Financial Institutions, total annual residential mortgage loan originations (excluding loans for residential or commercial development) swelled by 115% to $4.3 billion in 2000, compared with $2 billion in 1996 (see chart).

Despite the growth experienced during the past few years, local mortgage institutions experienced a significant reduction in mortgage activity in 2000 compared to 1999, due to high interest rates, which ranged from 8.5% to as high as 9.25%.

Besides interest rates, other factors–such as the uncertainty typical of an election year and a weakened economy–made 2000 a challenging year for the Puerto Rico mortgage sector, as people held back on home buying and on refinancing.

Based on figures provided by the office of the Commissioner of Financial Institutions, the 51 licensed mortgage institutions in Puerto Rico originated $4.3 billion in residential mortgage loans in 2000, an 18.8% reduction from 1999’s total of $5.3 billion.

These totals do not include commercial property loans, loans for residential or commercial development, or loans originated by cooperatives.

Already this year, the situation has changed. Interest rates now run between 6.5% and 7.5%. And they may keep on going down following Fed action last week. The new climate has already produced record results for some local mortgage banks in the first few months of 2001.

It also may augur well for the local construction industry. According to Planning Board figures, total value of construction during fiscal year (FY) 2000 was an unprecedented $7.03 billion, a 7.3% increase over FY 1999’s total of $6.55 billion. Private sector investment in the construction industry during FY 2000 (mostly housing) was 59% of the total, or $4.15 billion, surpassing the public sector. And this year, demand for housing continues to be so high, industry sources contend, that everything that is being built is sold–usually within days.

Mortgage industry leaders interviewed by CARIBBEAN BUSINESS attribute the sudden record increase of loan activity in the mortgage industry to several main factors–the recent drops in interest rates, a high demand for housing, spurred by the ongoing construction boom, and better loan products. All in all, they anticipate a record 2001.

Doral Financial Corp.

"In February we experienced a record month," said HF Mortgage Executive Vice President David Levis. "Phone calls and visits to our branches have increased more than 100% since the rates dropped. It’s a spectacular boom."

HF Mortgage, Doral Mortgage, Sana Investment, and Centro Hipotecario are subsidiaries of Doral Financial Corp. (DFC), the island’s largest mortgage institution. In 2000, DFC made $3.2 billion in mortgage loan originations (residential and commercial), controlling 44% of the residential mortgage loan market with approximately $2.3 billion in originations.

With a combined total of 41 branches in Puerto Rico, DFC expects to close $3.5 billion in total mortgage loans this year.

DFC’s servicing portfolio in 2000 totaled $2.2 billion.

Other leading mortgage institutions are already experiencing an increase in business activity since January’s drop in interest rates.

R-G Financial Corp.

"This year, we expect to make a larger amount of mortgage loans than last year, especially in the commercial sector," said Ramon Prats, president of both R-G Mortgage and its holding company, R-G Financial Corp. (RGF), the island’s second largest mortgage institution. "We hope the commercial loan activity becomes a constant one for the company."

RGF’s loan production for year ended Dec. 31, 2000 was $1.7 billion as compared to the previous year total of $1.9 billion, according to company documents.

RGF controls approximately 36% of the island’s residential mortgage loan origination market.

RGF is the holding company of R-G Mortgage and The Mortgage Store, formerly Champion Mortgage. The holding company recently restructured its operations and has plans to open four or five additional RG Mortgage branches this year, as part of an ongoing expansion.

Prats expects a very positive effect on the mortgage sector as well as on the entire financial industry if interest rates remain low or drop even more during the rest of the year.

R-G Mortgage has 25 branches, while Mortgage Store has seven, for a combined total of 32 branches islandwide.

Popular Mortgage

"Due to the reduction in interest rates in January, the first months of this year have been spectacular," said Silvio Lopez, President of Popular Mortgage, the island’s third largest mortgage institution. "During the first month of this year, we originated $170 million in mortgage loans, a 162.4% increase over January 2000’s total of $65 million."

During February, the Popular Inc. subsidiary closed $101 million worth of mortgage loans, a 58% increase over the $63.5 million it closed in January, and an 82% increase over February 2000’s total of $55 million.

Also in December 2000, Popular Mortgage completed the sale of a $400 million loan portfolio to Fannie Mae, the single largest mortgage loan transaction in one month by a Hispanic lender to the nation’s largest provider of funds for home mortgages.

Popular Mortgage–which originated $900 million in residential mortgage loans last year–controls approximately 15% of the island’s residential mortgage loan origination market, and has launched an aggressive multi-million dollar advertising campaign since January to increase its market shares.

Popular Mortgage has 22 branches, with plans to open eight more this year. The Popular Inc. subsidiary expects to have a total of 40 branches islandwide by the end of 2001.

Santander Mortgage

"There’s an interesting refinancing activity going on since the beginning of this year," said Ricardo Domenech, president of Santander Mortgage, the island’s fourth largest mortgage institution. "This year will definitely be a better year than last, which was not too bad for the industry."

Domenech, who is also president of the Puerto Rico Mortgage Bankers Association, indicated that in 2000, Santander Mortgage made approximately $300 million in residential mortgage loan originations.

Sandander’s construction lending for the year 2000 grew from $353.5 million to $396.9 million, an increase of 12.27%.

The commercial and industrial areas are the backbone of Santander’s lending activity.

The commercial and industrial portfolio–excluding construction loans–grew from $2.27 billion in 1999 to $2.36 billion in 2000, reflecting a 3.59% increase.

Santander Mortgage has 35 branches islandwide; the number should increase as more mortgage centers are integrated with Santander Bank, the holding company’s commercial bank subsidiary.

Oriental Group Mortgage

"People are finally reacting to the drop in interest rates," said Marcial Diaz, president of Oriental Group Mortgage, the island’s fifth largest mortgage institution. "For the first two months of the year, people were holding off, probably waiting for an additional drop. But now people have recognized the drop and are taking advantage of it."

Oriental’s mortgage originations for fiscal year (FY) 2000 amounted to $139.2 million, compared to $240.1 million in FY 1999–a decrease of 42%. The reduced production was largely attributable to last year’s higher interest rate environment.

Last year, Oriental Mortgage integrated its consumer operations (mortgage backed loans), processing an average of 4,000 mortgage loans a month. The subsidiary of Oriental Financial Group Inc. made between $220 million and $250 million in mortgage loan originations in 2000, Diaz indicated.

Oriental Mortgage has a total of 20 financial/mortgage centers (branches) islandwide.

Refinancing bonanza

"Due to the high demand for housing, last year there was lots of home-buying activity, but not much refinancing due to higher interest rates," said Diaz. "But on the other hand, there was an increase in personal loans secured by real estate."

With low interest rates, refinancing should account for 60% to 70% of the business that mortgage institutions expect to generate this year, with new home purchases accounting for the remaining 40% to 30%.

"When interest rates are low, consumers refinance their mortgage loans to consolidate debt, and that’s a very good thing," said HF Mortgage’s David Levis. "Consumer spending in Puerto Rico is very high."

But in addition to using mortgage loans for debt consolidation, consumers are also refinancing their homes to obtain a lower monthly payment, reduce a 30-year mortgage loan to 15 years (and still pay about the same amount), or for home improvements.

According to data from BSCH Investment and Santander Securities, Puerto Rico boasts the highest housing ownership rate in the Western Hemisphere, with 75% vs. 67% on the U.S. mainland. More than just a real estate transaction, homeownership in Puerto Rico is seen more as a financial investment.

"Homes in Puerto Rico increase in value at least 15% in less than a year because of tight market conditions, and the improvements we make to them," said Diaz. "As soon as we buy a home we make improvements, which increases its value even more. Properties in Puerto Rico build equity very quickly."

Puerto Ricans tend to refinance their mortgages, on average, every three to five years. Unlike personal loans or credit cards, interest paid on first and second mortgages is tax deductible.

Better, more affordable financing

Competitive 30-year and 15-year interest rates, lower required down payments, and increased competition among lenders have made mortgage financing easier and more accessible than ever.

Mortgages are now more affordable to a larger number of people in the middle and lower-middle income market segments, which represent about two-thirds of Puerto Rico households.

"Today’s financing programs allow a larger number of people to qualify for a home," said Oriental’s Diaz. "Most people have the repayment capacity for a mortgage, but not enough liquidity for a down payment. These new programs offering 97% and 100% financing on the value of a home, plus closing costs, enable more people to become homeowners."

In previous years, the Federal Housing Administration (FHA) loan was the only mortgage product to offer a 97% loan. Today, most mortgage lenders offer 97% and 100% on conforming loans and even 100% in certain non-conforming mortgages with additional collateral.

Conforming loans are loans that conform to national guidelines established by the Federal National Mortgage Association (Fannie Mae) or by the Federal Home Loan Mortgage Corp. (Freddie Mac). Both Fannie Mae and Freddie Mac set loan guidelines that make loans more marketable, which result in attractive rates for the homeowner.

Increased competition among mortgage banks has made it easier for prospective homeowners to qualify. For example, banks have relaxed somewhat the limit on monthly mortgage expenses as a proportion of disposable income they would allow a homeowner to have in order to qualify for a loan. "Previously, the relation between income and mortgage expenses was 36% in order to qualify for a loan. Today it’s 41%," said Santander Mortgage’s Domenech. "This difference has opened a door to a new set of people who couldn’t qualify before."

"Last year we launched the bi-weekly mortgage, and we were the first to launch a 97% conventional loan without a mortgage guaranty," said Popular Mortgage’s Lopez.

Santander mortgage was one of the first mortgage institutions to offer a 90% loan without mortgage guaranty and using a certificate of deposit as collateral.

"We were also the first to offer a 100% loan for newly built housing without guaranty and without additional collateral," said Domenech. "We were also the first to introduce the flexible mortgage."

According to industry sources, the percentage of people who default on their home mortgages in Puerto Rico is much lower than the rest of the U.S., although no statistics were available. Most mortgage lenders take the risk of issuing the loans because they know property values here increase very quickly and in the worst-case scenario, they can foreclose the property, sell it, and probably make a profit.

Construction and mortgage sectors go in tandem

Strong economic growth during the past decade created a fertile ground for the construction industry and thus, the mortgage sector.

"We are a small island, and demand for new housing is higher that the available supply," said Popular Mortgage’s Silvio Lopez. "According to local studies by the banking industry, there is a shortage of 100,000 to 150,000 new housing units in the low to middle income sector."

And that difference between supply and demand, said Lopez, is what keeps the mortgage market strong and solid.

"We have been fortunate that the growth experienced by the construction industry over the past few years has been a significant one," said Lopez. "It’s one of the industries that has benefited Puerto Rico’s economy the most, especially new housing construction."

"Thanks to the construction industry, the mortgage activity has remained stable," said Oriental Mortgage’s Marcial Diaz. "But with the reduction in interest rates, the mortgage activity–especially refinancing–has bounced back significantly."

Just as the high demand for new housing construction has helped sustain the mortgage industry, lower interest rates will benefit the construction of new projects (first and second homes) by allowing a larger group of consumers become homeowners.

"A drop in interest rates not only benefits the mortgage industry, but the construction sector as well by facilitating commercial loans for new housing construction and by helping more people qualify with lower monthly payments," said Santander Mortgage’s Ricardo Domenech. "This will definitely boost the government’s efforts to build 50,000 low income housing units."

Gov. Sila Calderon has proposed the construction of 50,000 low-income housing units plus an additional 50,000 housing units during the next four years.

"The construction industry will be paramount for the island’s economic development and for job creation, particularly now with the problems we are facing in the manufacturing sector," said Lopez. "The Calderon administration is moving diligently in that direction, especially with respect to the construction of social interest projects."

Consolidated Loans Secured by Real State
(Depository & Non-depository/All Institutions)
1996 to 2000
(In billions)
YEAR Total Number of loans Total Amount
1996 34,948 $2.0
1997 40,119 $2.4
1998 60,547 $3.9
1999 57,973 $5.3
2000 52,128 $4.3

Source: Commissioner of Financial Institutions
Market Share of Residential Mortgage
Loan Originations —
For Year 1999
(In billions)
Institution Amount %
Doral $2.3 44
R-G $1.9 36
Popular $0.8 15
Other $0.3 5

Source: Commissioner of Financial Institutions

Consolidated Sales of Mortgage Backed Securities (MBS)
(Non-depository/mortgage institutions)
1997 to 2000
MBS 1997 1998 1999 2000
GNMA 543,394 714,197 910,938 830,654
FNMA 22,726 181,959 655,590 387,692
FHLMC 0 178,048 233,108 0
CMO 6,100 4,544 0 0
TOTAL 572,220 1,078,748 1,799,636 1,218,346

Source: Commissioner of Financial Institutions

This Caribbean Business article appears courtesy of Casiano Communications.
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