Mortgage Rates, Applications Both Fall

Mortgage rates fell last week, but the decrease failed to spur homeowners and potential home buyers into additional mortgage refinances and home purchases, according to figures released today by the Mortgage Bankers Association.

Average contract rates on 30-year fixed rate mortgages fell to 5.14 percent for the week ending Friday, July 28, down from 5.24 percent the week before. At the same time, applications for new mortgages were down as well, declining a seasonally adjusted 2.2 percent from the week before.

The combination is unusual because mortgage applications, particularly for loan refinancing, tends to rise and fall opposite of the movement of interest rates. Applications for mortgage refinancings were down 3.1 percent from the week before, while applications for mortgages for home purchases were down a seasonally adjusted 1.0 percent.

The average 30-year rate reported by the MBA assumes an 80 percent loan-to-value ratio (20 percent down payment on a home purchase) with an average of 1.09 points paid. Total mortgage applications were up 22.7 percent from one year earlier.

Applications for insured mortgages for home purchases rose again in August to 40.4 percent of all home purchase mortgage applications, the highest rate since February 1991 and up from 31.7 percent one year ago. Demand for government insured FHA and VA mortgages have been rising sharply as two of the only sources of mortgages available with minimal down payments, as little as 3.5 percent on an FHA loan and 0 percent on VA loans for qualified veterans.

The slight decline in mortgage refinance applications suggests that some of the excitement may be wearing off the refinancing boom as rates have remained relatively stable over the past month and a half. With rates ranging 1 - 2 percent below what was offered on most fixed-rate mortgages within recent years, many homeowners flocked to take advantage of the lower rates, particularly last spring when 30-year rates dipped below 5 percent for several weeks.

While many borrowers would undoubtedly still like to refinance their mortgages, many are finding themselves unable to do so due to falling equity in their homes, leaving them "underwater" on their mortgages; that is, owing more than the property is worth. This is particularly a problem for homeowners with interest-only or other types of adjustable rate mortgages who were counting on being able to refinance before their mortgage reset to a higher rate or a balloon payment was due.

Some of these homeowners may be able to obtain refinancing now that Fannie Mae has raised the loan-to-value limit for Making Home Affordable refinances to 125 percent, a move intended to assist underwater homeowners. Freddie Mac is due to follow suit on Oct. 1. However, it remains to be seen whether lenders and servicers holding such mortgages will embrace the program.