Mortgage Applications Increase — or Did They?

Most media sources will report that mortgage applications posted their first increase in three weeks, according to data released by the Mortgage Bankers Association on Wednesday, as mortgage rates fell slightly. The group’s weekly application survey found that applications rose 0.5 percent from one week earlier, with a composite index rising to 421.6 for the week ended Aug. 22. Applications are off 31.2 percent from year-ago levels, however, the MBA said. But — as has been the case throughout the current cycle — the MBA data may be overstating forward demand for mortgages, given that the index data doesn’t correct for multiple applications. A separate application index, known as the MAX, found that applications fell sharply last week; the MAX corrects for multiple applications, and tends to be relied upon by prepayment modelers more often, as a result. The MAX national application index fell 6.4 percent last week, while a California sub-index fell an amazing 7.5 percent; the sharp decline in the MAX indices suggests that an overall increase in applications is likely tied to borrowers scrambling to get approved for a loan program. Of course, hard evidence of this trend is difficult to come by. But anecdotally, it’s easy to see how this could take place: underwriting standards are tighter than ever, and lenders often suggest that borrowers shop programs to ensure they can qualify for a loan. And, of course, troubled borrowers may be putting in application after application in the hope they can stave off a foreclosure. “As the credit crunch begins to slam into Main Street both psychologically and in actual funding, mortgage originations may set new historical lows for the balance of the year,” said Paul Descloux, publisher at Mortgage Maxx LLC, which publishes the MAX index. Heading back to the MBA’s data, the group said both refinance and purchase applications posted small increases last week; the refinance share of mortgage activity increased to 35.2 percent of total applications from 34.8 percent the previous week. But in terms of attempting to forecast future prepayment activity — a critical task in valuing mortgage bonds — doing so accurately is becoming more difficult as the market dislocation has continued unabated; sources tell HW that existing prepayment models are having trouble with current market conditions. “It’s definitely become more art than science in recent weeks,” one ABS analyst suggested to HW Wednesday morning, “which is sort of strange. Prepayment modeling isn’t usually something that requires so much leeway in interpretation. “It’s usually much more boring than that. But not in this market. Those that can get it right have a definite advantage.” For more information, visit http://www.mortgagebankers.com and http://www.mortgagemaxx.us.