June 10, 2009
To help the devastated housing market recover, Federal Reserve Chairman Ben Bernanke has set out a policy to push mortgage rates lower. Initially, the policy worked well, driving rates below five percent, setting off a refinancing frenzy.
But now, the rates are going up again and refinancing has slowed considerably. Is it possible interest rates have bottomed sooner than the housing market?
The Mortgage Bankers Association, in is weekly Mortgage Applications Survey, reports mortgage applications fell sharply for the week ending June 5.
The Market Composite Index, a measure of mortgage loan application volume, was 611.0, a decrease of 7.2 percent on a seasonally adjusted basis from 658.7 one week earlier. On an unadjusted basis, the Index increased 15.7 percent compared with the previous week and increased 7.6 percent compared with the same week one year earlier.
However, the Refinance Index decreased 11.8 percent to 2605.7 from 2953.6 the previous week and the seasonally adjusted Purchase Index increased 1.1 percent to 270.7 from 267.7 one week earlier.
The four week moving average for the seasonally adjusted Market Index is down 8.7 percent. The four week moving average is up 0.5 percent for the Purchase Index, while this average is down 12.2 percent for the Refinance Index.
The refinance share of mortgage activity decreased to 59.4 percent of total applications from 62.4 percent the previous week. This is the lowest the refinance share has been since November 2008.
What this means is bargain hunters are still snapping up distressed properties, but existing homeowners are no longer rushing to refinance their loans because rates, while still low by historical standards, have taken a sharp move higher.
According to the survey, the average contract interest rate for 30-year fixed-rate mortgages increased to 5.57 percent from 5.25 percent, with points increasing to 1.09 from 1.02 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.
The average contract interest rate for 15-year fixed-rate mortgages increased to 5.10 percent from 4.80 percent, with points decreasing to 1.04 from 1.10 (including the origination fee) for 80 percent LTV loans.
Though the Fed is still trying to push mortgage rates lower, the bond market isn't cooperating. Traders, worried that massive government spending will set off dangerous inflation, have pushed the yield on the Treasury's benchmark 10-year note sharply higher.
The rate jumped to 3.90 percent last week as volatility in government bonds hit a six-month high, according to Merrill Lynch's MOVE Index of options prices. It prompted Bernanke to warn Congress and the Administration that deficit spending could emerge as a threat to economic recovery.
