Rise in Refinance Demand Confirms Loan Pricing War in Primary Mortgage Market

The Mortgage Bankers Association today released its Weekly Mortgage Applications Survey for the week ending July 16, 2010. 

The MBA's loan application survey covers over 50% of all U.S. residential mortgage loan applications taken by mortgage bankers, commercial banks, and thrifts. The data gives economists a snapshot view of consumer demand for mortgage loans. In a low mortgage rate environment, a trend of increasing refinance applications implies consumers are seeking out a lower monthly payment. If consumers are able to reduce their monthly mortgage payment and increase disposable income through refinancing, it can be a positive for the economy as a whole (creates more consumer spending or allows debtors to pay down personal liabilities like credit cards). A falling trend of purchase applications indicates a decline in home buying demand, a negative for the housing industry and the economy as a whole.

Excerpts taken from the release...

The Market Composite Index, a measure of mortgage loan application volume, increased 7.6 percent on a seasonally adjusted basis from one week earlier.  On an unadjusted basis, the Index increased 19.5 percent compared with the previous week, which included the Independence Day holiday. The four week moving average for the seasonally adjusted Market Index is up 4.9 percent.

The Refinance Index increased 8.6 percent from the previous week. The increase in total refinance applications was driven by a 10.7 percent increase in conventional refinance applications, while government refinance applications decreased by 4.2 percent. The four week moving average is up 6.5 percent for the Refinance Index. The refinance share of mortgage activity increased to 79.4 percent of total applications from 78.7 percent the previous week. This was the highest refinance share observed in the survey since April 2009. 

This was also the highest Refinance Index observed in the survey since the week ending May 15, 2009...

The seasonally adjusted Purchase Index increased 3.4 percent from one week earlier, driven by an 8.0 percent increase in government purchase applications. Conventional purchase applications were essentially flat, increasing just 0.3 percent from last week. The unadjusted Purchase Index increased 15.3 percent compared with the previous week and was 35.7 percent lower than the same week one year ago.   The four week moving average is down 1.3 percent for the seasonally adjusted Purchase Index.

The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.59 percent from 4.69 percent, with points increasing to 1.04 from 0.96 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.  This was the lowest 30-year contract rate ever recorded in the survey. The effective rate also decreased from last week.

The average contract interest rate for 15-year fixed-rate mortgages decreased to 4.05 percent from 4.12 percent, with points decreasing to 0.88 from 1.04 (including the origination fee) for 80 percent LTV loans. This was the lowest 15-year contract rate ever recorded in the survey. The effective rate also decreased from last week.

The average contract interest rate for one-year ARMs decreased to 7.17 percent from 7.20 percent, with points increasing to 0.24 from 0.22 (including the origination fee) for 80 percent LTV loans.   The adjustable-rate mortgage (ARM) share of activity decreased to 5.2 percent from 5.5 percent of total applications from the previous week.

Call Guinness, the MBA's average mortgage rate index just hit a new record low.

Michael Fratantoni, MBA's Vice President of Research and Economics says:

"As rates on 30- and 15-year fixed-rate mortgages declined to the lowest levels recorded in the survey, refinance activity increased last week.  The refinance index is up almost 30 percent over the past 4 weeks, but is still well below the peak seen last spring....Refinance borrowers, aiming for the lowest possible rate, are getting conventional loans.  The strength in purchase applications comes from government loans, likely indicating that prospective buyers are drawn by the lower downpayment requirements."

Last week we noticed mortgage rates had detached from the movements of MBS price levels as lenders were looking to "buy the market". This data confirms that we are indeed witnessing a loan pricing war amongst the major lenders. READ MORE