Mortgage applications rise after rates drop

1/17/2014 8:52:48 AM

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After a slow start in the first week of the new year, mortgage application activity soared in the second week after interest rates fell. For the week ending Jan. 10, mortgage applications increased 11.9 percent from the previous week, according to the Mortgage Bankers Association.

After the Department of Labor's December employment report revealed that only 74,000 jobs were added to the economy during the month, mortgage rates dropped from their average of 4.625 percent to around 4.5 percent. The Federal Reserve's recent decision to reduce stimulus spending may be affected by the weak employment report. While the national unemployment level did drop from 7 percent to 6.7 percent in December, the change is attributed to more Americans who have stopped searching for work. Once a person is no longer actively seeking a position, the government doesn't count them as unemployed.

Refinancing
The refinance activity dropped to just 62 percent of all mortgage applications, down from 63 percent the previous week and the lowest share since September 2013. The decline in the refinance share could be a sign that the market is turning toward new home purchase applications. It is common for many homeowners to apply for the best mortgage refinance rates when interest is lower, but as rate rise, buyer applications will dominate the share of the market. However, because rates dropped, more Americans applied for both refinancing and new home loans.

"The drop in rates was large enough to trigger a pickup in refinance volume," Michael Fratantoni, MBA's chief economist, told CNBC. "The increase in purchase volume is more likely reflecting an increase coming out of the holidays, beyond what our seasonal adjustment model anticipated."

Home affordability and mortgage options
The rise in purchase applications might be a positive sign for the coming year in the housing market. Despite the fact that mortgage rates have risen more than 1 percent from where they were a year ago, Americans are still applying for home loans and don't seem to be affected by the increase. This suggests that the housing market is still affordable and homeowners are able to receive a low cost mortgage.

Adjustable-rate mortgage activity accounted for 8 percent of the total mortgage market during the week, unchanged from the previous week's report. Adjustable-rate mortgages are likely to become more popular if mortgage rates rise higher, as many lenders offer favorable loan terms that typically have lower interest rates for the first few years of the loan compared to fixed-rate mortgages.

Additionally, credit standards loosened at the end of 2013 in order to allow more Americans to become homeowners and spur economic growth through home purchases. New rules defining a qualified mortgage have already gone into action in January. However, lenders are not required to follow these new rules, which will tighten requirements and standards, and may still approve mortgages outside the definition.

"2013 closed with the loosest credit requirements of the year," Ellie Mae President Jonathan Corr told CNBC. "The average FICO score for all closed loans last month was 727, 11 points below the 2013 average and 21 points lower than December 2012."

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