A Rise In Mortgage Applications Defies Higher Interest Rates; Subprime Woes Deepen

By Jason Simpkins

Though prognostications about the overall health of the U.S. housing market remain bleak, and interest rates have hit their highest level in nearly a year, the number of new mortgage applications unexpectedly grew last week.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchasing and refinancing loans for the week ended July 6, increased 1.1% to 626.2.

The group’s seasonally adjusted purchase index rose 3.8% to 453.9, while its seasonally adjusted index of refinancing applications decreased 3% to 1,636.9, its lowest since December 2006.

However, the National Association of Realtors has pushed recovery estimates back to the second quarter of 2008. The organization now predicts flat prices for existing homes in the first quarter and a less than 1% gain in the second quarter of 2008.

The NAR also anticipates existing home sales to drop below the 6 million annual sales pace to a rate of 5.96 million. That figure is only approximate as sales and price figures from the just completed period are not yet available.

If these forecasts prove true however, it will be the first time in four years that quarter sales were below the 6 million home annual sales pace.

Such competing and often contradictory reports and statistics show just why it’s so difficult to accurately estimate when the housing downturn will end – let alone turn around.

For instance, with the housing market continuing its skid, financial stocks dropped more than 3.5% during the month of June, making them one of the worst-performing groups in the Standard & Poor’s 500 Index.

Why is that noteworthy? Financial stocks are usually market leaders during healthy periods. The fact that their performance was so poor – especially relative to other parts of the market – means we should all be scrutinizing the financial market, peering under its rugs and into its corners, and even searching its cabinets, closets and drawers, to see what other “financial skeletons” that might be hidden.

Take this whole subprime mess. Bear Sterns continues to endure a public flogging for the meltdown of two hedge funds invested in subprime loans. But now we see that S&P and Moody’s Investors Service – Wall Street’s two debt-rating heavyweights – are scrutinizing the subprime debt market. S&P may be looking to downgrade $12 billion in subprime bonds – the debt-instrument underpinnings of the subprime loans that are causing all these worries. Moody’s has already downgraded nearly 400 bonds
Make no mistake, this will have an impact.

And there are still more wildcards to come.

For instance, more than 2 million subprime mortgages of the adjustable rate variety (ARMs) are going to reset at much higher rates in the months to come, a reality that will weigh heavily on the already problem-plagued housing market.

Marginal borrowers who qualified for subprime loans only – and who took out certain types of hybrid ARMs in 2004 and 2005 – did so in order to land ultra-low “teaser rates” for the first two or three years of their mortgage. But now they are going to see those teaser rates reset – and the joke will be on them: Many will see their monthly mortgage payments climb by 35% or more.

Defaults from that will escalate substantially.

In terms of the MBA report, the refinancing portion of mortgage activity slid down to 36.2% of total applications from 37.8% the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 20.4% from 21.0% of total applications, the MBA said.

Interest rates rose, however. The average contract interest rate for a fixed-rate loan of 30 years duration rose to 6.65% from 6.5%. Points decreased to 1.52 from 1.69 (including the origination fee) for 80% loan-to-value (LTV) ratio loans.

For a fixed-rate loan of 15 years duration, the average contract interest rate rose to 6.31% from 6.2%. Points fell slightly, declining to 1.41 from 1.43 (including the origination fee) for 80% LTV loans.

For one-year ARM loans, the average contract interest rate increased to 5.60% from 5.49%, though points decreased to 1.16 from 1.17 (including the origination fee) for 80% LTV loans.

The MBA mortgage survey covers approximately 50% of all U.S. retail residential mortgage originations, and has been conducted weekly since 1990, the trade group said. Respondents include mortgage bankers, commercial banks and thrifts. The base period for all indexes is March 16, 1990, and the base values are 100, the MBA said.