Purchase Applications Rise Ahead of FHA Changes

By:: Kirk Haverkamp | October 06, 2010

Mortgage applications for buying a home rose last week to their highest level since the end of the homebuyer tax credit program, according to survey figures from the Mortgage Bankers Association (MBA).

The MBA’s seasonally adjusted Purchase Index rose 9.3 percent, hitting its highest level since the week ending May 7, immediately following the April 30 deadline for homes sales contracts to qualify for the tax credit. Purchase applications have been struggling back in recent weeks after plummeting following the end of the program and up an average of 2.0 percent a week over the past four weeks.

FHA insurance premiums rise

The rise was driven by a 17.2 percent increase in applications for FHA mortgages, compared to a 3.6 percent increase in applications for conventional mortgages. Jay Brinkmann, MBA chief economists, said the boost may have been due to homebuyers seeking to get their applications in before new guidelines for FHA loans took effect Oct. 4.

Those guidelines included raising the annual insurance premium on FHA mortgages to 0.9 percent of the loan, up from 0.55 percent previously. The up-front premium charged for FHA loans decreased to 1 percent from 2.55 percent previously, although this savings would be cancelled out by the higher insurance fees after about five years.

Purchase applications, an advance indicator of homebuying activity, remain 34.7 percent below their level of the same week one year earlier.

Refinancing down despite falling rates

Overall mortgage applications actually declined last week, driven by a 2.5 percent decline in refinance activity, which makes up about four-fifths of all mortgage applications. The decline occurred despite a big drop in interest rates for 30-year fixed rate mortgages, which fell to an average 4.25 percent, the lowest on record, down from 4.38 percent in the previous week’s MBA survey.

Refinance applications have been steadily declining in recent weeks despite falling interest rates, falling an average of 4.2 percent a week over the past month.

The average interest rate on 15-year fixed rate loans showed a more modest decline, to 3.73 percent from 3.77 percent the week before, but was also an all-time low in the MBA survey.

The MBA weekly survey covers 50 percent of U.S. residential mortgage applications each week, with reported interest rates based on 80 percent loan-to-value loans.

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