Are Mortgage Application Numbers On Target?

It’s hardly a secret that the real estate marketplace has cooled. Newspapers, the stock market, blogs, foreclosed homeowners, the Federal Reserve and lots of bankrupted lenders can tell you that much has changed during the past year.

You reasonably might think that with home sales down, new construction slowing and interest rates up, surely it would make sense if there was a decline in mortgage applications when compared with a year ago.

But sometimes there’s a difference between what seems intuitively right and what survey results show. For instance, according to the Mortgage Bankers Association, as of Aug. 15, loan applications were up “20.6 percent compared with the same week one year earlier.”

Huh?
 
The vast and increasing volume of loan applications seems curious when you consider what else is happening in the real estate world: For the week ending Aug. 17, HSH Associates, the leading mortgage information service, reported that a typical fixed-rate, 30-year mortgage was priced at 7.02 percent — that’s up from 6.63 perecent in August 2006. For a $200,000 mortgage, the rate increase amounts to more than $600 a year in additional interest costs — enough to disqualify marginal borrowers.

Home sales, says the National Association of Realtors, are expected to total 5.75 million units in 2007, down from the 6.32 million recorded in 2006. New-home sales, says the National Association of Home Builders, are expected to total 870,000 this year, down 10.2 percent from a year earlier. That’s a total of decline of roughly 638,000 sales in a single year, meaning demand for purchase money mortgages is also down by 638,000 originations.

There are fewer lenders making loans, including many of the nation’s largest lenders.

“Why has the relationship between purchase applications and home sales weakened recently,” asked Fannie Mae economist David W. Berson last May. “One likely explanation is that the stricter guidance of depository institution regulators over the past year with respect to mortgage loans has made it more difficult for some households to qualify for a loan. As a result, those households have had to make multiple applications in order to get a mortgage loan — thereby pushing up purchase applications without increasing home sales.”

Under Berson’s theory, rising mortgage applications are best seen as an index of borrower frustration. If this is correct, then loan application numbers and loan origination statistics can only be related if we know, on average, how many loan applications are made by the typical borrower.

Is there a hitch in Berson’s hypothesis? You bet — money. There’s often a fee for an application and credit report. If Berson is correct then a lot of borrowers are paying multiple application fees for loans that will never be originated. Given the drive to spend as little as possible on financing, many borrowers would plainly resist multiple applications.

Another idea is that mortgage applications are up while home sales are down because many borrowers are refinancing. This solution would make sense except that it faces three hurdles: First, many recent loans cannot be refinanced because loan balances are greater than the property values. Second, many lenders have cut back or no longer deal in subprime or Alt-A financing. Third, many borrowers claimed income in the original loan application which cannot now be proven when full documentation is required.

One large and visible contingent of borrowers with refinancing potential are those who face foreclosure. Many homes could be saved if only borrowers could get loans with lower rates and payments. But many distressed homeowners are plainly unable to get new financing, one reason behind soaring foreclosure trends — trends which no one disputes.

“There may well be a good reason why applications are reportedly rising at the very same time that many local markets are losing steam,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com, the nation’s leading foreclosure marketplace. “Right now, however, that reason remains unclear to many.”

So what’s the answer? Perhaps the MBA can explain why loan applications are rising while all around real estate unit sales are falling, lender failures are increasing and huge numbers of borrowers are losing their homes.
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Columnist Peter G. Miller is the author of The Common-Sense Mortgage and is syndicated in more than 100 newspapers.

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