Tighter Credit Standards Drive Jump in Mortgage Applications
The total number of mortgage applications rose for the second straight week, according to data released Wednesday by the Mortgage Bankers Association -- but, as has been the case for some time, most market insiders didn't see the strong 7.5 percent surge in overall applications as an indicator of healthy forward demand. The MBA said in a press statement that applications rose surged for the week ending Aug. 29, primarily driven by a 10.5 jump in purchase applications. While most media outlets were quick to attribute the jump to an extremely slight drop in interest rates, sources that spoke with HW had a different explanation. "Borrowers are shopping to find a program they can qualify for, or are frantically trying to find a way to get out of the time bomb they're now in," said one source, an ABS analyst that commented on condition of anonymity. "We're not looking for prepayments to bounce any time soon." Lenders and insurers have dramatically tightened their underwriting criteria as the private-party lending market has all but disappeared during the ongoing credit crunch. The result is that borrowers that might have qualified earlier this year may no longer qualify, multiple sources suggested on Wednesday. Mortgage application data is a component of most prepayment models, which use application totals as an indicator of likely repayment activity in future periods; but as was the case during the housing boom, the MBA application data is proving to be less-than-useful in predicting prepayment activity. Forecasting prepayments is a critical aspect of valuing mortgage-backed bonds in the secondary market. Buttressing the viewpoint of borrower distress driving a flurry of applications is a separate report from Mortgage Maxx LLC, which publishes a separate application index that corrects for multiple applications from the same borrower. The company's MAX index fell 1.4 percent last week, after falling 6.4 percent the week before. "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 Mortgage Maxx publisher Paul Descloux. "As decisions to purchase real estate have relatively long lead times, the fall-out from this summer’s tightening of credit may only be beginning." That's a thought that sits in line with the sentiment HW gathered from discussing forward mortgage origination outlook with a few key analysts; it also fits in with recent projections for a steep drop in origination totals for both this year and next. Underscoring the resurgence of the Federal Housing Administration, the Mortgage Bankers Association said that total application activity in government-insured mortgages -- mostly FHA endorsements -- jumped nearly 20 percent versus the prior week. For more information, visit http://www.mortgagebankers.org.