Mortgage Rate Declines Lead to Increased Applications

Demand for purchase and refinance mortgages have risen from their historic lows on the strength of lower interest rates.

A proverb advises, "Money grows on the tree of patience." Undoubtedly, anyone who's interested in buying a home, or refinancing her existing one, knows a thing or two about patience. The good news is that those who've been waiting for the right time to finance may finally be rewarded-with lower mortgage rates.

It's been a bad year for mortgage lenders. They're facing big losses and mounting foreclosures. Many would-be homebuyers and existing homeowners have given up on the prospect of getting a purchase or refinance mortgage-which has led to a dramatic year-over-year decline in mortgage applications.

Hope springs eternal

In this context, it only takes a small sign to foster hope for a recovery. That harbinger arrived when the Mortgage Bankers Association (MBA) released its index of mortgage applications for the week ended November 7.  (The MBA index is calculated from a weekly survey that covers roughly half of all retail residential mortgage loan applications in the U.S.)  The index rose 12 percent, from 379.9 in the prior week to 425, indicating that more people are in the market for mortgage financing.

Analysts believe that the increase is related to a decline in mortgage rates. The average rate on a 30-year, fixed-rate mortgage with a loan-to-value ratio of 80 percent was 6.47 percent in the prior week, but dropped 23 basis points to 6.24 percent. That change results in a savings of about $15 per month for every $100,000 financed.

The MBA's numbers suggest that most of the demand is coming from existing homeowners who are interested in refinancing.  The association's refinancing index jumped 16 percent to 1248.4, pushing the percentage of refinance applications to 45.1 percent of total mortgage applications. The purchase index increased also, but by a lesser percentage, from 260.9 up to 284.4.

While the demand figures were up from the prior week, they're still down significantly relative to the same week last year.

A step in the right direction

The modest uptick in demand for mortgage loans isn't cause for celebration just yet. It's definitely a move in the right direction, but it would be more encouraging to see the demand for purchase mortgages increase faster. Increases in home sales, along with a slowdown in foreclosures, are the prerequisites for a housing market recovery. Naturally, before people can start buying homes again, they need to be able to obtain financing. Of course, the MBA index only tracks mortgages applied for, not mortgages funded. But if demand increases significantly, lenders may be compelled to get back to the business of making mortgage loans.

Patience is the virtue that will ultimately get us through to the other side of this housing crisis. Perhaps further rate declines, combined with low housing prices, will finally be enough to scare up some housing demand.