Rising U.S. mortgage rates sap loan applications

On Wednesday June 10, 2009, 7:11 am EDT

By Lynn Adler
NEW YORK (Reuters) - A spike in U.S. mortgage rates drove down total home loan applications last week as demand for refinancing shriveled to the lowest level since November, the Mortgage Bankers Association said on Wednesday.
Borrowing costs have soared as bond yields have risen, even as the Federal Reserve has sopped up hundreds of billions of dollars in bonds to keep rates low and stimulate the housing market.
The average 30-year fixed mortgage rate jumped 0.32 percentage point in the June 5 week to 5.57 percent. That was nearly a full point above the record low rate of 4.61 percent in March, the trade group said.
The vast majority of mortgage activity this year has been from homeowners cutting costs with new loans at rock-bottom rates.
The Mortgage Bankers Association's seasonally adjusted index of total applications dropped 7.2 percent to a four-month low of 611.0 in the latest week.
The refinancing index slumped 11.8 percent to a nearly seven-month low of 2,605.7 last week, and refinancing accounted for about 59 percent of all applications, the lowest share since November. As recently as April, refinancings accounted for almost 80 percent of all home loan applications.
Purchasers have been slower to act in the current housing market, with some waiting in hopes that prices will fall further and others paralyzed by unemployment or wage cuts.
Demand for loans to buy homes was little changed last week, rising 1.1 percent to 270.7, having basically been stuck in neutral throughout the important spring sales season.
"I'm not optimistic for 2009 or 2010," Mark Goldman, real estate lecturer at San Diego State University and mortgage broker, said on Tuesday.
The swift percentage point rise in mortgage rates cuts the purchasing power of a borrower by about 10 percent, he estimated.
"Employment is still bad, wages are still low, interest rates are up. That's going to hurt the housing market," said Goldman.
The number of U.S. jobs cut in May was the lowest level since September, but the unemployment rate rose to 9.4 percent, the highest since July 1983.
First-time buyers taking advantage of new tax credits and investors snapping up foreclosed properties at distressed levels have in recent months buttressed the hardest-hit housing market since the Great Depression.
But borrowers will foreclose in record numbers at least for another year, several industry sources, including the Mortgage Bankers Association, predict. Those homes will add to the already large supply of unsold properties and will keep pressuring prices.
Home prices on a national level have tumbled more than 32 percent from the peak three years ago, according to Standard & Poor's/Case-Shiller indexes.
"Prices continue to erode on a national level, and with the rest of the economy not doing well either and the jobless rate constantly increasing, we don't see a recovery in housing on a national level coming soon," Kevin Marshall, president of Clear Capital, based in Truckee, California, said this week.
"That doesn't mean there aren't values to be had out there," he added.

Bailout Refi Plan: Does It Work at 5.5%?

On Monday June 8, 2009, 4:23 pm EDT

For most Americans, the tick up in the rate on the 30-year-fixed from just under 5 percent to around 5.5 to 5.75 percent doesn't mean much, other than yet another bump on the road to potentially buying a home. But to the Obama administration, I have to believe the increase is a huge blow to its homeowner bailout program.
The Making Home Affordable refinance program was designed to allow borrowers with up to 5 percent negative equity to refinance into a lower-rate mortgage. "The Obama Administration's program will provide the opportunity for up to 4 to 5 million responsible homeowners who took out loans owned or guaranteed by Fannie Mae (NYSE: fnm)and Freddie Mac (NYSE: fre) to refinance through the two institutions over time," the press release touted on March 4, 2009.
When I interviewed HUD Secretary Shaun Donovan at the end of April, the first thing he jumped on was mortgage rates. "We've seen, since the plan was announced on February 18th, a dramatic drop in mortgage rates down to record lows for 30-year fixed rated financing, below 5 percent for five weeks in a row now. I think that's incredibly important."
I couldn't agree more. Refinance in April and May surged on the back of those low low rates. On May 14, the U.S. Treasury called a press conference to "Highlight Implementation Progress" on the Making Home Affordable program. It cited 233,000 eligible refinance applications through Fannie Mae with over 51,000 having LTV's between 80 and 105 percent. 2,150 of those refinance loans closed and were delivered to Fannie.
All good, but what happens now that we're at a higher interest rate on the 30-year fixed? I asked Treasury for an interview, but they politely declined, instead sending me the following from a Treasury Spokesperson: "Rising rates will slow refinancing, but we don't expect them to affect mortgage modifications significantly."
The modification program isn't driven by the rate on the 30-year fixed, since banks are lowering interest rates much farther than that for eligible borrowers. But the refi plan, which was expected to help more borrowers than the modification plan (borrowers who are not yet behind on their monthly payments) is all predicated on those low low rates.
Guy Cecala, of Inside Mortgage Finance, says, "if rates hover around near 5.5 percent, it will be harder to generate a lot of refi business since most people already have rates around percent." But he adds, "I think the recent rise is an aberration and that mortgage rates will drift back down to under 5 percent within the next month or so." He bases that assumption on the fact that 90 percent of the current mortgage market is government-related (Fannie, Freddie, FHA, VA).
But Mark Hanson of the Field Check Group is less optimistic about rates. The borrowers who qualify for the refi program already had fixed rate loans. "Someone with a 60 percent LTV 2 years ago has 105 percent today. Back then that 60 percent person already got under 6 percent," notes Hanson.
And he doesn't see rates going back down either: "I think the Fed does something near term to try to wrestle rates back down, but I do not think they can stay meaningfully below 5 percent over time without being national subsidized at 4.5 percent."