Mortgage Applications Drop Sharply

Mortgage applications dropped sharply last week, declining almost 19 percent from the week before despite a third consecutive week of falling interest rates, the Mortgage Bankers Association (MBA) has reported.

According to the MBA's weekly survey, new mortgage applications fell to their lowest level in seven months, casting a dark cloud on what has been a string of generally encouraging news about the housing market. The biggest bite was a huge drop in mortgage refinancing, with applications falling 30 percent from the week before.

Mortgage applications to fund new home purchases also declined, falling 4.5 percent from the week before after posting small but fairly consistent gains over the previous month.

Rates drop, but so do applications

The declines came despite a drop in mortgage interest rates, which usually helps to boost applications. Average rates on 30-year fixed rate loans were reported at 5.34 percent, down from 5.44 percent the week before, and their recent high of 5.57 percent three weeks ago.

The decline in mortgage applications runs contrary to what has been a spate of weak, but generally positive, recent economic indicators. The Commerce Department recently announced that consumer spending and incomes rose slightly in May, and the National Association of Realtors announced this morning that home sales in May rose for the fourth month in a row, albeit at only a 0.1 percent rate.

There have been a number of negative signs as well. The Conference Board reported this week that its reading of consumer confidence fell in June, contrary to economist's expectations, following a big jump in May. And the number of seriously delinquent mortgages rose to 5 percent of all U.S. mortgages at the end of the first quarter of 2009, with 2.5 percent in foreclosure, according to a report released this week by the U.S. Office of the Comptroller of Currency and Office of Thrift Supervision.

Waiting for further rate declines?

One possible reason for last week's decline in mortgage applications could be that consumers are hoping rates will decline further, after a short but sharp series of increases. Many market analysts have noted that the Federal Reserve has expressed a preference for keeping 30-year mortgage rates below 5 percent to spur economic recovery; with the Fed meeting last week, borrowers may have been sitting on the fence to see if the Fed would take further action to bring rates down.

The Fed announced at the conclusion of its meeting last Thursday that it would be largely staying the course. Although announcing no new actions to bring rates down, the Fed's steady position seemed to calm investor fears of long-term inflationary pressures, contributing to lower rates.

The MBA survey covers the week ending last Friday, June 26. With the current week shortened to four days by the July 4 holiday, it may be difficult to determine whether borrowers are returning to the market this week or if the downward trend is holding.