U.S. Home Loan Demand Surges as Interest Rates Dive

U.S. mortgage applications rose for the first time in three weeks as a drop in interest rates fueled a surge in demand for home purchase and refinance loans, an industry group said on Wednesday.

The rise in activity, however, was being dismissed by some Wall Street economists who say the data is out of line with other housing market reports that have been painting a poor picture.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications (USMGM-ECI), which includes both purchase and refinance loans, for the week ended Aug. 3 increased 8.1% to 656.5, its highest level since early June.

Applications were 18.7% above their year-ago level. The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was up 1.2% to 626.0.

Drew Matus, senior financial markets economist at Lehman Brothers in New York, said despite last week's sharp rise, the U.S. housing market is still showing overall weakness.

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"The mortgage applications data keeps showing a recovery in the housing market that doesn't seem to exist in any other piece of data," he said. "The data really only shows the 'normal' mortgage lenders, so there is a bias toward the better performing segment of the market."

Matus said the MBA's data is not representative of the lending industry since survey participants are overwhelmingly those who deal mostly with prime loans, not the subprime mortgage market that has been hit by record levels of default notices.

The MBA's data does not cover mortgage brokers, major participants in the loan origination market. The subprime mortgage market, which caters to borrowers with poor credit histories, is primarily a broker market.

Furthermore, the meltdown of the subprime mortgage market has spurred a widespread tightening of lending standards, which some say is artificially inflating the MBA's data as prospective borrowers take out multiple applications to obtain a single loan.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.41%, down 0.09 percentage point from the previous week. Interest rates were below year-ago levels at 6.45%.

The MBA's seasonally adjusted purchase index (USMGPI-ECI), widely considered a timely gauge of U.S. home sales, rose 7.4% to 447.4. The index was also above its year-earlier level of 388.9, a rise of 15.0%.

The group's seasonally adjusted index of refinancing applications (USMGR-ECI) soared 9.1% to 1,881.1. The index was up 23.9% from a year ago when the index stood at 1,385.2.

The refinance share of applications increased to 39.9% from 39.4% the previous week.

Mixed Signals for Housing Market

U.S. housing industry indexes, in general, tend to be volatile, but recent data suggest a glimmer of hope may be on the horizon for the hard-hit sector.

The National Association of Realtors last week said pending sales of previously owned U.S. homes rose at their fastest pace in more than three years in June.

The NAR Pending Home Sales Index, based on contracts signed in June, rose 5% to 102.4 from a downwardly revised index of 97.5 in May.

"If pending home sales continue to move in line with or move in concert with the mortgage applications data, then things are going to get a lot better a lot more quickly then people suspect," said Lehman's Matus. "I think the odds of that happening are relative low."

Fixed 15-year mortgage rates averaged 6.16%, down from 6.20%.

Rates on one-year adjustable-rate mortgages (ARMs) decreased to 5.69% from 5.73%.

The ARM share of activity increased to 22.5%, up from 22.3% the previous week.

The MBA's survey covers about 50% of all U.S. retail residential loans. Respondents include mortgage banks, commercial banks and thrifts.