The Mortgage Bankers Association on Wednesday reported a sharp jump in application activity for the week ended May 2 –- a 15.6 percent rise in the seasonally-adjusted market composite, 19.1 percent in refinancings and 12.1 percent in purchases. In stark contrast, the market’s other application index, published by Mortgage Maxx AFS on Monday, reported that applications actually fell by 7.1 percent over the same week. The difference, according to the publisher of what industry types call simply “The MAX,” is that their report filters out duplicate applications on the same address. Long time critics of the MBA index have argued that inclusion of multiple applications make it more volatile than true underlying market activity; in particular, they say it leads to an overstatement of increases in loan demand. The MBA survey was designed in 1990, and had its last significant overhaul in the mid-1990s (some statistical techniques were altered and the universe of respondents was expanded; before the industry’s implosion it covered about 50 percent of originations). The problem with multiple applications became more obvious as the 90s wore on, with the rising importance of the mortgage broker origination channel. Further problems arose with lenders’ leap onto the Internet, where borrowers can now shop for the lowest rates from multiple lenders. The result is that repeat applications are thought to have a particularly strong effect in good times, when lenders compete for business and rate shopping pays off. The flip side — being seen now, perhaps for the first time — is that tightening credit conditions should also generate multiple applications. As traditional mortgages become more costly, borrowers (or their brokers) shop more extensively for the most affordable product, or for a program that the borrower can qualify for. Given current credit conditions, jumbo and weaker credit borrowers are well-advised to apply “all over town” if they want to get a loan at all. Layoffs must have lengthened time “in the queue” for GSE-eligible borrowers – that and a “fear factor” would encourage even borrowers with pristine credit to apply to more than one lender. Moreover, selection of an appraiser is different depending on whether a bank or a broker is ordering the appraisal –- yet another reason for borrowers not to put all their eggs in one basket. Traders and investors –- who translate application activity into expectations of prepayments and supply trends over a short run of one to three months –- have traditionally used Mortgage Maxx application data. The service acknowledges that its data may not be quite as geographically diverse as the MBA, but it does capture every lender in a jurisdiction, thus weeding out duplicates. The Maxx index is actually an adjunct to the company’s paid subscription service, which provides monthly prepayment projections over the short-term, and is based on title searches, the applications survey and other data sources. Insight into how many applications close, and when, over forward months is crucial to traders and investors with short-term horizons. Put another way, three months is roughly the window in which a successful, bona fide application moves to closing, generates a prepayment, and the loan emerges in a new pool, but standard prepayment models tend to be “far sighted” and blind to the short run — which is what makes application data critical for most traders and investors.

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