Apps Jump as Rates Fall

Defying a two-week decline, home loan applications jumped 11.9% from the prior week — bringing the Market Composite Index to 689.4, according to the Mortgage Bankers Association of America’s (MBAs) survey of mortgage bankers, commercial banks and thrifts. The index, however, is still below its figure of 736.7 a year ago, despite that the blackout in the Northeast had slowed mortgage activity at that time.

While the Purchase Index increased by 6.2%, MBA said refinancing activity accounted for most of the weekly increase in applications — with the Refinance Index soaring 20.9% to 1982.7. The refinance share of mortgage activity increased to 40.7% of total applications from 37.2%.

“The jump in refinance loans comes after a fairly steady drop in rates over the last month,” said Jay Brinkmann, MBA’s vice president of research and economics, in a written statement. “More importantly, rates are now about half of a percentage point below where they were this time last year, creating a refinance incentive for many borrowers who have taken out home loans since the middle of last summer.”

Week-to-week, the average 30-year fixed-rate mortgage slipped 4 basis points (BPS) to 5.81%, while the 15-year edged down 5 BPS to 5.19%, according to Freddie Mac’s latest Primary Mortgage Market Survey.

“Mortgage rates eased even further this week in response to a setback in economic growth during June and possibly July,” Freddie’s chief economist Frank Nothaft said in a written statement. “However, we believe the slowdown to be temporary and we expect growth to pick back up in the second half of this year.”

In its August economic and housing outlook, the government-sponsored enterprise said the most significant boost to the economy will come from the accumulation of orders for manufacturers.

Meanwhile, the economic slowdown has led Freddie to reduce its estimate for the average 30-year; the mortgage giant’s August forecast has the 30-year at 6.1% this quarter and at 6.3% until the end of the first quarter next year — the figures are respectively 30 BPS and 20 BPS below its predictions a month ago.

The surveyed industry panelists at Bankrate.com , who have been off the mark for the past three weeks, did not provide much direction for mortgage rates over the next month and a half; 37.5% expect an upturn, another 37.5% predict a downturn, and the other 25% believe that rates will remain about the same.

As for the 1-year Treasury-indexed adjustable-rate mortgage (ARM), its average of 4.01% was down 7 BPS from last week, Freddie said, but above the 3.75% at this time last year.

ARMs reportedly comprised about a third of all applications, MBAs survey said. But, “as Fed actions contribute to the flattening of the yield curve, the allure of ARMS might begin to fade,” Freddie said in its outlook, adding that the share will go below one-third during the third quarter of 2005. MBA forecasts the 1-year Treasury ARM will average 5.0% at that time.

From the responses of banks in a July survey by the Federal Reserve Board, many ARM borrowers will be adjusting to higher rates. Banks indicated that on average, almost 90% of conventional ARMs will be repriced within the next year, compared to 12% of hybrid ARMs, the Fed said, adding that, on average, 60% of hybrid ARMs will not be repriced for at least three years.

The survey also reportedly showed that almost one-third of domestic banks said hybrid ARMs accounted for more than 50% of all residential mortgage loans on their books. Only one-fifth of respondents said conventional ARMs, which reprice at regular intervals, comprised over 50% of their mortgage loans.

More than one-half of respondents said their share of hybrid ARMs was 75% of all ARMs originated during the past three months. About one-half of domestic bank respondents indicated conventional ARMs represented less than 10% of all residential mortgage loans on their books, and most of those banks said these loans comprised less than 5%.

At Thursday’s close, the 10-year Treasury note had a 4.21% yield and price of 100 8/32. At last week’s close, the note yield was 20 BPS higher.