Best Week of Year for Refis; MBA sees Purchase Loan gains Next Year

Falling interest rate precipitated a major refinancing rally during the week ended October 17 even though Columbus Day shortened the business weeks in some locations.  The Mortgage Bankers Association's (MBA's) Refinance Index jumped 23 percent compared to the previous week, the largest increase for the index this year, far surpassing an 11 percent gain in January and taking the index to its highest level since November 2013.  Applications for refinancing made up a 65 percent share of all applications compared to 59 percent the previous week and the average size of a loan for refinancing rose to $306,000 the highest level since MBA started its survey in 1990.

Refinance Index vs 30 Yr Fixed

The surge in refinancing drove the MBA's Market Composite Index up 11.6 percent on a seasonally adjusted basis from the week ended October 10 and the unadjusted index rose 12 percent.  Purchase home mortgages however did not participate in the application booklet.  Both the seasonally adjusted and unadjusted Purchase Indices fell by 5 percent and the unadjusted index was down 9 percent from the same week in 2013.

Purchase Index vs 30 Yr Fixed

"Continuing concerns about weak economic growth in Europe and a few US economic indicators that came in below expectations caused a flight to quality into US Treasuries last week, leading to sharp drops in interest rates," said Mike Fratantoni, MBA's Chief Economist. "Mortgage rates have fallen close to 30 basis points over the last four weeks."

In a separate statement earlier in the week Fratantoni said he expects 2015 to be a better year for purchase mortgages and that overall loan volume will increase by 7 percent to a total of $1.19 trillion. Purchase originations are projected to grow by 15 percent to $731 billion from 635 billion in 2014.  Refinancing will fall back by 3 percent to $457 billion from $471 billion in 2014.  The trend will continue in 2016 with purchase originations rising to $791 billion and refinancing falling further to $379 billion.  This will bring the total volume in 2016 to $1.17 trillion, slightly below 2015 projections.

"We are projecting that home purchase originations will increase in 2015 as the US economy continues on its current path of stronger growth, job gains and declining unemployment.  The job market has shown sustained improvement this year; with robust monthly increases in both payroll jobs and job openings," Fratantoni said.  "We are forecasting that strong job growth, coupled with still low mortgage rates, should translate to an increase in home sales and purchase originations.

"Our projection for overall economic growth is 2.9 percent in 2015 and 2.4 in 2016, which will be driven mainly by strong consumer spending and business fixed investment, as households continue to spend on durable goods, such as cars and appliances, and as businesses invest in new plant and equipment.  Moreover, after several years of contraction, the rate of government spending should no longer be a drag on the economy.

"We expect that the 10-Year Treasury rate will stay below three percent through the first half of next year as concerns about broader global issues have caused a flight to quality, with investors seeking safety in US Treasury securities.  However, if the global turmoil diminishes and US economic growth continues, we anticipate the rate will exceed three percent in the second half of 2015, continuing to increase through 2016.  We expect the Federal Reserve will keep short-term rates near zero until mid-2015, when we expect to see the first fed funds rate increase.

"With the recent drop in mortgage rates, some borrowers now have an incentive to refinance and with the home price gains of the last two years more homeowners have enough equity to refinance, so we expect a pickup in refinance application activity over the next few months, which will lead to higher refinance originations in early 2015," Fratantoni said.

MBA upwardly revised its estimate of originations for 2014 to $1.11 trillion from $1.01 trillion, and for 2013 to $1.85 trillion from $1.76 trillion, to reflect the most recent data reported in the 2013 Home Mortgage Disclosure Act (HMDA) data release.

MBA's Weekly Mortgage Applications Survey found both contract and effective mortgage rates down across the board during the week ended October 17.  The average contract interest rate for 30-year fixed-rate mortgages (FRM) with conforming loan balances ($417,000 or less) decreased to 4.10 percent, the lowest level since May 2013, from 4.20 percent, with points increasing to 0.21 from 0.17.

The average rate for 30-year jumbo FRM (balances greater than $417,000) decreased to 4.03 percent, the lowest level since May 2013, from 4.14 percent while points increased to 0.20 from 0.10.  The rate for FHA backed 30-year FRM decreased to 3.81 percent, the lowest level since June 2013, from 3.90 percent, with points decreasing to 0.07 from 0.08. 

The 15-year FRM had an average rate of 3.28 percent, the lowest level since May 2013, with 0.22 point.  The previous week the rate was 3.41 percent, with 0.28 point.

The average contract interest rate for 5/1 adjustable rate mortgages (ARMs) decreased to 2.94 percent, the lowest level since June 2013, from 3.05 percent, with points decreasing to 0.37 from 0.38.  The share of applications for ARMs jumped last week from 8 percent to 9.4 percent of all applications, the highest level since June 2008.

MBA's survey gathers information regarding more than 75 percent of all U.S. retail residential mortgage applications from mortgage bankers, commercial banks and thrifts. Base period and value for all indexes is March 16, 1990=100 and interest rate quotes are for loans with an 80 percent loan to value ratio.  Points include the origination fee.