Mortgage Rates And Loan Demand

Sun, Jun 27, 2010

Mortgages

 

Mortgage Rates Set New Record at 4.69%, So Why Is Demand Weak?

By Nick Timiraos

Average rates on 30-year fixed-rate mortgages reached their lowest levels in more than 50 years this week. On Thursday, rates tracked by HSH.com hit 4.69%, down from 4.75% on Wednesday and an average 4.85% last week.

Freddie Mac also said on Thursday that rates this week had fallen to an average 4.69%, which is the lowest level recorded since it began its survey in 1971. Brokers were quoting rates as low as 4.25% on 30-year loans on Thursday for well-qualified borrowers.

HSH.com says you’d have to go back to at least the 1950s to find comparable rates—and those may not be perfect comparisons given how different the mortgage market was back then.

Rates have fallen over the past month, first as the European debt crisis sparked a flight to safety that helped drive down rates for American borrowers. Over the past week, renewed concerns about the health of the U.S. economy have also put pressure on rates. Rates on 30-year fixed-rate jumbos are down to 5.65%, a seven-year low, while banks offered “hybrid” jumbo adjustable-rate loans with a five-year fixed rate of 4.49%, according to HSH.

But if rates are so low, why isn’t demand for new loans picking up?

For one, most borrowers who could refinance probably did so last year, when rates fell below 5% in March, August, and December as the Federal Reserve purchased mortgage-backed securities to push down rates. Few expected rates to fall even further when the Fed ended its purchases at the end of this past March.

Many borrowers with an incentive to refinance can’t qualify with today’s tougher lending standards or don’t think it’s worth paying the closing costs on a new loan.

Credit Suisse estimates that around 61% of all borrowers with a 30-year fixed rate mortgage could lower their mortgage rate by 0.75 percentage point at current rates. But analysts estimate that only 38% of those borrowers could actually qualify at current standards.

More borrowers can’t qualify because they don’t have enough equity in their homes, their credit scores have taken a hit, or they’ve seen their income reduced. Mortgage application activity is down 0.5% over a four-week moving average tracked by the Mortgage Bankers Association. Weak demand for refinancing suggests that banks have exhausted the pool of homeowners who can refinance at today’s rates given the current tight lending standards.

Low rates typically spur waves of refinancing, but low rates aren’t enough to spur home purchases independent of other factors, such as a healthy economy that fuels job growth and household formation.  That can lead to some of the dissonant headlines of the present, where home sales plunge even as mortgage rates reach generational lows.

Applications for new purchase loans have fallen in five of the past six weeks, according to the MBA, and loan applications are down 37% from one year ago to lows last recorded in February 1997.

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