Mortgage Applications Continue to Drop

April 18th, 2010

Data released by the Mortgage Bankers Association indicates a slowdown in home purchases and refinances. Other economic data points to continued growth in the economy without more jobs.

Here is some economic news and data that impacts mortgage rates and your refinance mortgage and purchase mortgage applications.

Mortgage Applications Drop as Rates Dip

In its Weekly Application Survey, the Mortgage Bankers Association (MBA) announced that total applications for the week ending April 9, 2010 dropped for the eighth time in ten weeks, with mortgage applications down 9.5% from the prior week. The total number of applications is the third lowest weekly total since June 2009. Leading the way in the drop was a 19.1% drop in government (most FHA mortgage) applications for the week. Overall, purchase mortgage applications were down 10.5% for the week and 17.5% lower than the same week in 2009.

Also for the week ending April 9, the MBA reported that the average mortgage rate for a 30-year fixed-rate mortgage at 80% loan-to-value dipped from 5.31% to 5.17%, with the average cost increasing from 0.64 points to 0.91 points.

Throughout the past week, daily mortgage rates have been very volatile due to the absence of the Federal Reserve from the mortgage-backed securities market. Although individual and institutional investors have tried to fill the void in the market where the Fed once was (buying $1.25 trillion in mortgages from January 2009 through March 2010), there was much less consistency in demand. As a result, markets have seen large swings in price, and the direction of mortgage rates has been difficult to predict.

FHA Mortgage Insurance Increases

The primary factor in the drop in FHA mortgage applications was the large increase in the upfront mortgage insurance premium for FHA mortgages effective April 5. For FHA mortgage applications taken on or after April 5, the new mortgage insurance premium paid upfront (usually added to the FHA mortgage amount) increased from 1.75% to 2.25%. That translates into an increase of $500 for every $100,000 borrowed.

Jobs, Earnings, Confidence

There was not much in the economic news to dispel the consensus that any economic recovery is going to be jobless for a while. For the week, initial jobless claims rose over 20,000, with 484,000 Americans filing for first-time unemployment insurance. Also, a report on the confidence of small-business owners was released, and their confidence is at the lowest level in seven months. Small- and medium-sized businesses employ the vast majority of Americans, which makes this low confidence a bad sign for a speedy employment recovery.

A slew of corporations have announced their quarterly earnings, with most announcements showing profitability. This profitability is not due to an increase in business so much as the cutting of expenses made by the companies to pare losses. The number-one expense for almost every company is salaries and benefits. With major corporations making profits at current levels of employment and confidence low with small businesses, there does not appear to be any macroeconomic indication of sustained growth in employment.

Consumers Buying

Retail sales for March increased after a dull February. Growth in retail sales (1.6%) was well above estimates, indicating consumers were back in the market as spring approached. Whether the increase was due to the change in weather from February or a fundamental increase in willingness to spend will be seen in future retail sales reports.

While they are spending more, consumers are not driving prices up. The very critical Consumer Price Index, the number that indicates if our economy has any inflation, was a very tame 0.1% for the month of March. Taking out prices for volatile food and energy purchases, the index was a dead flat 0.0%. The very good news with the CPI was the year-to-year figure, which came in at only 2.3%, or 1.1% with food and energy taken out. This is the flattest year-to-year number since 2004.

This is good news if you are applying to refinance your mortgage or purchase a home, as inflation is a critical piece of economic data that pushes mortgage rates higher.

Households Declining, Foreclosures Increasing

According to another Mortgage Bankers Association survey, the number of households in America has shrunk considerably. From 2005 to 2008, the population grew by an estimated 3.4 million people; during this same time frame, the number of US households decreased by 1.2 million. That means more people living in fewer residences. An obvious contributing factor is the increase in the number of residential foreclosures.

Foreclosures continue to grow: foreclosures in the first quarter of 2010 are up 35% from the same period in 2009. Given the increase in unemployment in the past year, a growth in foreclosures is not a surprise, but the amount of the increase exceeded expectations.

Later this month, the Federal Reserve will release the minutes from its last meeting and issue its statement on interest rates and what they are anticipating. The Fed statement is very important to mortgage rates, as any change in the language of the statement could move rates up or down. Currently, the Fed seems to be sticking to its previous statement that they foresee extremely low interest rates for an extended period of time. How long is an “extended period of time”? The Fed will let us know when it changes its language.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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