As interest rates pulled back last week, refinancing drove mortgage application activity slightly higher. The Mortgage Bankers Association said that its Market Composite Index, a measure of application volume, increased 1.4 percent on a seasonally adjusted basis during the week ended August 15 and was up 1 percent on an unadjusted basis.
Refinancing activity increased to a 55 percent share of mortgage applications from 54 percent the previous week and the Refinance Index increased 3 percent. The spike in refinancing was offset by a decline in applications for purchase mortgages and the seasonally adjusted Purchase Index decreased 0.4 percent from the week ended August 8.
Mortgage rates continued moving higher today after headlines suggested a chance for deescalation in Ukraine. It was the geopolitical risk in Ukraine that coincided with a strong move lower on Friday. Strong economic data also contributed to the weakness as a report showed Residential Construction rose at the fastest pace since November. Economic strength tends cause investors to sell bonds and move to riskier assets. When bonds--like those that dictate mortgage rates--are sold, rates move higher.
Today's move completely undoes last week's improvement. That said, most of that improvement was seen on Thursday and Friday, so it's not quite as dramatic as it might seem. In fact, with the exception of the last three days, today's rates are still the lowest in over a month. The most prevalently-quoted conforming 30yr fixed rate remains 4.125% for the best scenarios. 4.25% is still quite common and 4.0% is fading from view.
Two important measures of strength in the housing and construction industries moved substantially higher in July the U.S. Census Bureau and the Department of Housing and Urban Development said today. The number of permits issued and construction starts both jumped while housing completions were also up. In addition today's report revised significantly upward the relatively dismal June numbers released last month for all three construction elements.
In July permits were issued for construction of privately owned residential housing at a seasonally adjusted annual rate of 1,052,000 units. This was an increase of 8.1 percent from the June rate of 973,000 units and was 7.7 percent higher than the estimate for July 2013 of 977,000. June permits were originally estimated to be at the rate of 963,000 units.
After hitting the lowest levels in over 2 months on Friday, mortgage rates bounced almost all the way back to Thursday's levels. That's somewhat significant as the drop between Thursday and Friday was one of the strongest moves lower in months.
The original impetus for Friday's strength had been headlines suggesting the armed conflict in Ukraine was taking a turn for the worse. When markets arrived this morning to see that didn't turn out to be the case, some of the "panic premium" began evaporating. As the day progressed, there was a stark absence of disconcerting headlines, and it's those negative headlines that fuel investor demand for the types of safe-haven securities that benefit mortgage rates.
The Consumer Financial Protection Bureau (CFPB) has increased threshold amounts for loans governed by various trigger limits under Qualified Mortgages (QM) and Ability-to-Repay (ATR) Rules. Under Regulation Z of the Truth in Lending Act CFPB is required to look at loan amounts subject to point and fee limits, adjusting them if necessary, on an annual basis. The following changes will go into effect on January 1, 2015.
- The limit for loans where points and fees may not exceed 3 percent of the total loan amount will increase from $100,000 to $101,953.
- For a loan amount greater than or equal to $61,172 but less than $101,953 points and fees may not exceed $3,059. Under current rules points and fees may not exceed $3,000 for loan amounts between $60,000 and $100,000.
Measures of builder confidence in the new home market rose again this month. The third consecutive monthly increase in the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) brought that metric back to its highest level since January.
The HMI was at 55 in August, a two point gain from July. The number is a composite based on responses to a monthly survey in which new home builders are asked for their perceptions about current single-family home sales and future prospects for such sales. Any score over 50 indicates more builders perceive the market as good than perceive it as poor.
There were numerous headlines swirling mid-morning concerning military violence between Ukraine and Russia. Financial markets responded in a big way with stocks losing quit a bit of ground by noon and US Treasuries falling to their lowest levels since June 2013. MBS, however (the mortgage-backed securities that dictate mortgage rates), were not able to experience quite as much benefit, essentially meaning that Mortgage rates didn't improve nearly as much as other sectors of the bond market.
Part of this underperformance in the mortgage market is a simple fact of life when the rest of the financial world is responding to unexpected geopolitical headlines.
Home prices "firmed" in several markets in the second quarter and, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Opportunity Index (HOI), affordability dipped accordingly. The Index, a measure of the percentage of homes sold during the quarter that were affordable to families earning the U.S. median income, declined from 65.5 percent in the first quarter to 62.6 percent in the second.
The U.S. median income in the second quarter was $63,900 and a median priced come cost $214,000 compared to $195,000 in the previous quarter. Interest rates, another factor in affordability, compensated a bit for the rising home prices, decreasing by an average of 13 basis points to 4.44 percent.
Less than a half-year after the Ability-to-Repay (ATR) and Qualified Mortgage (QM) rules took effect most lenders report little impact on their business strategies but they do anticipate an increase in their operational costs. The new rules were mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act and put into place by the Consumer Financial Protection Bureau. The ATR generally requires lenders to consider and verify factors that indicate consumers will be able to repay the loan. Mortgage loans with limited points and fees and restrictive loan features such as no negative amortization are considered to meet the definition of a QM and presumed to comply with the new rule.
At the same time many secondary market investors have strengthened their requirements for post-funding quality control reviews by lenders to insure compliance with investor guidelines. These investors include the government sponsored enterprises Fannie Mae and Freddie Mac.
CoreLogic recently awarded its Academic Research Council Excellence Award to a study conducted by professors from three universities who looked at reasons why so many homeowners fail to refinance their homes even when it is financially advantageous to do so. The award for scholarly research in the real estate and mortgage fields was given to Benjamin J. Keys, Harris School of Public Policy, University of Chicago; Devin G. Pope, Booth School of Business, University of Chicago; and Jaren C. Pope, Department of Economics, Brigham Young University and their paper "Failure to Refinance."
According to the study, housing decisions can have substantial long-term consequences for household wealth accumulation because almost two thirds of the median household's total wealth is from housing. Public policies have been crafted to encourage homeownership but their effectiveness hinges on homeowners' wise housing decisions.