Ah, the problems of trying to model residential mortgage purchase and refinancing applications. When mortgage rates fall, model predict a rise in both purchase and refinancing applications. This has left mortgage modelers dazed and confused.
But the recent Mortgage Bankers Association report, revealed that mortgage applications DROPPED 4.78% WoW despite mortgage rates dropping as well.
Mortgage rates have been dropping since November, yet mortgage purchase applications dropped in for the latest week. Very likely this was the displacement of purchase applications was simply the “start of the year” effect after a sleepy holiday season.
Ditto for mortgage refinancing applications. Despite mortgage rates declining. there was “start of the year” surge. But continued rate decreases have resulted in generally declining purchase applications after the surge.
On a long term view, purchase applications have remained sedate following the financial crisis and new regulations.
Mortgage refinancing applications remain in Death Valley.
Perhaps there is a communications breakdown?
MarketWatch has the tantalizing headline of “The Average Adjustable-rate Mortgage Is Nearly $700,000.”
True, the average loan size for ARMs (adjustable-rate mortgages) is substantially higher than for FRMs (fixed-rate mortgages).
But here is a catch. Mortgage refinancing applications are virutally dead.
Mortgage purchase applications are relatively sedate but rising following the financial crisis with new rules governing bank lending such as QM (Qualified Mortgage) and other Consumer Financial Protection Bureau (CFPB) rules.
A more relevant chart that the one posted by MarketWatch is a comparison of average loan size by purchase applications and refi applications. Note that following the financial crisis, average loan size for purchases is higher than for refi applications.
For the week ending 02/01/19, mortgage purchase applications SA declined 4.58% while mortgage refis were up 2.6% from the preceding week.
The bottom line is that the MarketWatch piece, while tantalizing, is fundamentally misleading. Mortgage refi applications are nearly dead and mortgage purchase applications are rising again, but are no where near the 2000-2007 levels.
So, who killed mortgage refinancing applications?
These guys! (Paul Volker can be excluded from the blame list).
Back in 2010, bank analyst Chris Whalen wrote this piece for Zero Hedge entitled “The Sanders Polynomial or Why “Esto se va a poner de la chingada””.
Yes, things got ugly for the residential mortgage market following the mortgage purchase application bubble that peaked around 2005. If you fit a non-linear curve to MBA Mortgage Purchase Applications, you can see a polynomial peaking in 2005.
Here is the updated chart. Mortgage purchase applications have started to rise again since 2010, but at a much slower pace. And there is no polynomial since 2010, just a nice linear increase.
But the mortgage market has fundamentally changed since 2005-7. First, the volume of adjustable rate mortgages (blue line) has declined to under 10% of all mortgage applications. Second, the number of mortgage originations under 620 (also known as “subprime” is far below the levels seen in 2003-2007. Also, the number of non-vanilla ARMs (like pay-option and Limited Documentation ARMs) have reduced greatly.
So when the narrator at the end of the movie “The Big Short” said that nothing has changed, that was fundamentally incorrect. As you can see, ARMs and subprime have essentially vanished. Here is a chart of The Big Short period (in red) and notice that mortgage lending truly did change.
Also, a non-banker lender, Quicken Loans, is the second lending originator after Wells Fargo. My how times have changed.
But are lender credit standards too high? Or are lenders and investors low riding credit?
How about a spoonful of extra credit box expansion?
But let’s not turn back the credit clock too far!!
Mortgage applications increased 13.5 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 11, 2019.
.The Refinance Index increased 19 percent from the previous week to its highest level since March 2018. The seasonally adjusted Purchase Index increased 9 percent from one week earlier to its highest level since April 2010. The unadjusted Purchase Index increased 43 percent compared with the previous week and was 11 percent higher than the same week one year ago.
You can see the spike in refi apps coinciding with a decline in 30-year mortgage rates.
And you can see an even large spike in mortgage purchase applications with the decline in mortgage interest rates.
Fannie Mae’s 30Y current coupon rate has declined and is lower than it has been for most of 2018.