The Wall Street investors who supply a large chunk of the nation's mortgage money have come up with intriguing new intelligence on where to put their home-finance dollars this year and next.
They're studying fresh state-by-state data on how quickly average home-owning families -- such as you and your neighbors -- pay off their mortgages. The earlier you pay off, the more eager the deep-pocket investors will be to pump dollars in your direction. The slower you pay off, the less profitable you'll be. And where you live -- whether it's Texas, Michigan or Washington State -- will be a key determinant of how quickly you'll turn over your mortgage.
That's the upshot of a major study completed here by researchers at Salomon Brothers Inc., an investment banking firm. Although it rarely is recognized as such by consumers, Salomon is a leading force in the national mortgage market -- buying, selling or creating the mortgage securities that funnel billions of dollars worth of pension fund, insurance company and other capital into new home loans every year.
When Salomon researchers recently examined the records of tens of thousands of mortgages purchased by large institutional investors across the country, they were struck by a strong statistical pattern: People who live in certain states pay off their mortgages far more quickly than the national norm, whereas people in other states seem to hang on to them forever. (Prepayments of mortgages occur for a variety of reasons, but are typically caused by sales of the home by owners moving out, or by refinancings of existing loans.)
Michael Waldman, the head of the Salomon research team, said the state-by-state differences he documented not only proved to be significant statistically, but also "amounted to a kind of social and economic barometer" for different sections of the country.
"What we've documented is essentially a societal measure," he said. "The rate of mortgage prepayments in a particular state tells you an awful lot about what's going on there."
It tells you about the strength of the state economy, for example. It correlates well with the rate of unemployment, disposable-income growth, migrations of elderly, and activity in the new and resale market overall.
More importantly from Waldman's clients' perspective, it offers clues on where large investors can make a little extra on mortgage purchases simply by knowing the prepayment proclivities of the state population. Because the investors buy the loan packages at discount prices, early loan payoffs return them higher profits.
Where are the big prepayers nationwide? From Waldman's study, portions of which were published in January's Mortgage Banking, a trade journal, the fastest payers during the past three years have been living deep in the heart of Texas.
Depending upon what time of year the sample was taken, a hefty 7 1/2 to 9 percent of Texans with 30-year conventional (non-FHA or VA) mortgages were prepaying them in full per year compared with rates that fell well below half that in other states, Waldman found.
Unlike much of the nation, Texas' economy escaped the brunt of the recession in the early 1980s, he noted. Unemployment was consistently several points below the national rate, housing starts and sales were strong, and migration of new industries and professional jobs into the local economy outpaced most other areas.
"Texas offered an almost ideal environment," encouraging people to prepay their loans, Waldman said. Not only was household income rising rapidly, but also Texas lenders aggressively pushed deep-discount, adjustable-rate loans to wean homeowners away from fixed rates.
The opposite extreme was in the State of Washington. Hit hard by the recession in several dominant industries, Washington homeowners' mortgage prepayment rates dropped to less than 1 percent during mid-1982, and only rebounded to 4 percent by last October.
That low rate reflected an essentially static housing environment, Waldman said. People couldn't afford, or wouldn't risk, a move or prepayment.