Mortgage applications drop as rates jump

December 17th, 2010

Concerned about higher deficits and more government spending bond investors continued selling this week, pushing rates higher. Following the political action as the 111th Congress comes to an end, markets seemingly ignored economic data through most of the week. Mortgage calculator users waiting for rates to recede may be in for quite a wait; and the wait may not give you the lower rate you want.

Applications down

While refinance calculators continue to be active, users are not completing and turning in refinance mortgage applications. The Mortgage Bankers Association's Weekly Application Survey reports that refinance applications declined for the week ending Dec. 10, 2010 for the fifth straight week.

While refinance applications have declined, the purchase application index decreased 5.0 percent from the prior week. Pre-qualification calculator users seeing their purchasing power decreasing may consider speeding up their new home buying decisions to avoid even higher rates.

Rates spike

The volume drop in mortgage applications mirrors the mortgage rate increase. Spiking to its highest rate since the week of May 20, 2010, the Freddie Mac Primary Mortgage Market Survey for the week ending Dec. 16, 2010, was at 4.83 percent for a 30-year fixed-rate mortgage at 0.7 origination points. The rate increased for the fifth week in a row.

Using the monthly payment calculator for a $250,000 30-year fixed-rate mortgage the payment has increased almost 8 percent since the Freddie Mac all-time low rate Nov. 11, 2010, when it was at 4.17 percent. For a $250,000 loan, the payment at the current 4.83-percent rate is $1,316; the payment at the Nov. 11, 2010, rate was $1,218.

Tame inflation

The Commerce Department released the Consumer Price Index for November 2010 and the data supports the Federal Reserve's argument for its asset purchasing program. The Fed would like inflation to be between 2 and 3 percent. In November prices rose 0.1 percent from October and were up 1.1 percent from November 2009; well below the Fed target inflation.

Retailers had a reason to smile in November 2010 as sales increased 0.8 percent from October, 1.2 percent if auto sales were excluded. The American consumer is an integral part of economic growth and recovery. If retail numbers continue to rise through and beyond the end of the year holiday shopping period it may be a sign of the economy shrugging off the stagnation of the past two quarters.

Just say "no"

Next week's Freddie Mac survey may show a decrease if market movements early next week continue the trend of Thursday and Friday this week. With rates increasing since mid-November on inflation fears, over-supply in bond market fears, rising federal deficit fears and end of the year sell-offs to protect portfolio profits, the Mortgage Backed Securities markets reversed several days of decline to end the week.

The impetus for the reversal was the Senate's overwhelming rejection of a $1.1 trillion spending package that had investors selling fast and furious earlier in the week. The bill was initiated to fund the federal government through the end of the year and prevent a shutdown. It quickly snowballed from an omnibus package to fund federal departments into a huge spending bill that ran over 2,500 pages and had more than 7,000 earmarks. Rates shot up on the prospect of the impact this bill would have on the deficit, federal borrowing and injecting another trillion dollars into the economy.

A sigh of relief

On news that Senate Majority Leader Harry Reid (D-Nev.) was pulling the bill and working out a one-page bill to extend current spending levels to fund the government into February or March 2011, bond markets let out a sigh of relief and prices climbed (yields, or interest rates, dropped).

As the 111th Congress winds up its final sessions markets are keeping a very close eye on any additional spending bills that may result. Lower spending will mean lower, or at least stable, mortgage rates; increased spending from Congress will push rates higher.

Rate markets are showing heightened political awareness and focusing less on economic data. With concern about federal debt levels and the impact on interest rates, until Washington's fiscal policy shows reductions in spending you can expect investors to continue to put pressure on rates to increase.

These are very volatile times in the mortgage markets. Underwriting is increasingly difficult, guidelines are changing regularly and rates are on the rise. Use the mortgage calculators and follow the economic news and political news out of Washington to calculate mortgage payments and costs for your new home loan or refinance mortgage.

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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