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The fast-rising cost of housing today is shrinking demand for home loans but also pushing those who are in the market toward cheaper, adjustable-rate mortgages.
Total mortgage application volume fell 2.7 percent last week from the previous week, according to the Mortgage Bankers Association. The seasonally adjusted tally stands nearly 12 percent lower than a year ago.
Mortgage rates didn't move last week, but they are nearly three-quarters of a percentage point higher than on Election Day. Home prices continue to rise far faster than incomes, and those higher housing costs have borrowers searching for the best deals on home loans. The government-insured FHA program offers low down-payment loans, but rates on FHA mortgages rose last week. Insurance premiums remain higher than before the recession.
Borrowers are now turning to shorter-term, adjustable-rate loans, which offer lower interest rates. Their share of total applications has doubled to 9 percent since the election. That is the highest level since October 2104. The adjustable-rate share of mortgages dropped dramatically following the housing crash, as borrowers fled to the safety of the 30-year fixed rate.
"Homebuyers in a strong housing market are looking for ways to extend their purchasing power, and ARMs are one way to do that," said Mike Fratantoni, chief economist for the MBA. "While the ARM share got as high as 35 percent precrisis, it is really unlikely it will get nearly as high now given [new] regulations, which effectively prohibit many types of ARMs that were prevalent then."
Higher interest rates continue to shrink the pool of borrowers who can benefit from a refinance. Those applications fell 3 percent for the week and are down 26 percent from a year ago. Loan applications to purchase a home fell 2 percent for the week but are up 5 percent from a year ago. Demand for housing is strengthening as the spring market kicks into gear, but a tight supply of homes for sale nationwide drags on the selling pace.
Mortgage lending is still conservative. In fact, the average credit score for borrowers in the third quarter of last year rose from the previous quarter, according to CoreLogic, whose quarterly credit-risk index has been falling steadily. That could change as mortgage rates rise further, which is expected.
"Refinance volume will decline with higher mortgage rates, and lenders generally will respond by applying the flexibility in underwriting guidelines to make loans to harder-to-qualify borrowers," said Frank Nothaft, chief economist at CoreLogic. "As this occurs, we should observe our index signaling a gradual increase in default risk."
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances of $424,100 or less remained unchanged last week at 4.46 percent, with points increasing to 0.41 from 0.37, including the origination fee, for 80 percent loan-to-value ratio loans.