It's a time-tested relationship -- higher mortgage rates equal lower demand for mortgages, and fewer applications from potential borrowers. And vice versa. Like many things throughout the housing mess, however, more than a few tried-and-true axioms about how things are supposed to work are finding themselves thrown out the window.
Like the idea that national home prices can't decrease year over year. Or the idea that all housing is always an appreciating asset over the long term.
Wednesday's data from the Mortgage Bankers Association
, which found that applications sank a seasonally adjusted 14.1 percent last week despite easing mortgage rates, is just the latest example of traditional mortgage bankers' logic turned onto its head.
The average rate on 30-year fixed-rate mortgages stood at 6.46 percent, the MBA said, down from the prior week's 6.59 percent. But the apparent drop in mortgage rates clearly didn't translate into increased demand from borrowers, as most might usually expect.
Compared against the same week in 2007, applications dropped an unadjusted 30.3 percent, the MBA survey found. The survey covers about half of all U.S. retail residential mortgage applications, but does not correct for multiple application activity from a single borrower.
A separate index, maintained by Mortgage Maxx LLC
, known simply as "the MAX" among Wall Street prepayment researchers, also found a similar 6.9 percent weekly drop in application activity last week. The MAX index corrects for multiple applications, and as a result tends to be relied upon by prepayment researchers on Wall Street as a leading indicator of mortgage demand.
Driving the drop appears to be a particularly steep dive in refinancing interest. Applications for mortgages to purchase home were off a seasonally-adjusted 7.8 percent in the week ended July 25 compared to the prior week, the MBA said; in comparison, mortgage refinancings dropped 22.9 percent on a week-to-week basis.
One source suggested that borrowers remain somewhat spooked the negative press surrounding Fannie Mae (FNM)
and Freddie Mac (FRE)
"I think more than a few would-be borrowers heard about the problems at the GSEs, or maybe just learned who the GSEs were and that they've got some problems," said the source, an originator in the Dallas-Fort Worth area.
"The result is a perception that now isn't a good time to get a loan, right or wrong. But we're seeing it."
For more information, visit http://www.mortgagebankers.org
Disclosure: The author was long FRE, and held no other relevant positions, when this story was published; other indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.