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Industry News

Weakening Mortgage Market Seeing More ARMs

May 21, 2004

Fixed rates and apps down, ARM rates and share up

By Coco Salazar

On the heels of more industry forecasts calling for falling originations, mortgage applications showed signs of contraction. While adjustable rates increased, long-term rates took a breather from two consecutive months of increase and aren't expected to change for the rest of the year.

The Market Composite Index -- a measure of overall mortgage application activity -- fell 11.9% from the previous week to 654.1 on a seasonally adjusted basis, according to the latest Weekly Mortgage Applications Survey by the Mortgage Bankers Association of America (MBA). Application activity is way below the level a year earlier, when this index measured 1562.8.

The Refinance Index continued its descension, falling 16.8% from the previous week to 1816.9, MBA said. The refinance share of mortgage activity also continued to slip, dropping to 37.4% from 39.8% one week earlier.

The Purchase Index dropped by 8.1% to 454.2, according to the trade group.

In a recent interview with Bloomberg, Jay Brinkman, MBA's vice president of research and economics, said that although application activity has decreased, he does not believe this will be the trend week over week.

"We've been bouncing around record levels, particularly in the purchase market for the last month or two, so an 8% drop from record levels shouldn't be a big surprise," he said. "I don't see that this is going to be the trend. Instead I think we're still on the track to set a new record this year over last year."

In its recent mortgage finance market update, MBA predicted purchase originations will be 57%, or $1.4 trillion of this year's total mortgage originations -- which are expected to total $2.4 trillion.

The 30-year fixed-rate mortgage averaged 6.30%, edging down 4 basis points (BPS) from last week, according to Freddie Mac's latest Primary Mortgage Market Survey. A year ago, the 30-year average stood at 5.34%. MBAs revised forecast showed that the 30-year will average 6.2% in third quarter and average 6.4% in the fourth quarter.

"The rise in mortgage rates stalled this week primarily because of rising tensions in other parts of the world, causing foreign investors to flee to the security of US Treasuries," said Freddie chief economist Frank Nothaft in a statement. "Consequently, yields remained mainly unchanged from last week, and so did long-term mortgage rates."

As for the 15-year fixed rate, the average fell 5 BPS from last week to 5.67%, Freddie reported.

Freddie said the 1-year Treasury-indexed adjustable-rate mortgage (ARM) is at levels not seen since last January -- coming in at 3.99% this week -- 9 BPS above last week. The ARM share of activity edged up to 35.2% of total applications from 34.8% the previous week, according to MBA.

Brinkman pointed out the ARM share is near record levels and said one factor influencing this shift is the number of people switching to hybrid ARM products, which allow them to lock in the rate for 3 to 5 years, over long-term mortgages. Besides being a more affordable option, he said borrowers also choose ARMs over 30-year fixed-rate mortgages when they are aware their stay in the house will be for short period of time.

While Brinkman said the ARM share of the market will reach around 40% by the middle of next year, MBA forecasted the share will only reach 33% at the end of this year.";

The 10-year Treasury note closed Thursday at a 4.70% yield and price of 100 11/32. The note closed at a 4.62% yield at the end of last week.

While MBA laid out its forecast on rates over the next quarters, the majority of's surveyed panel of mortgage brokers, bankers and other industry experts, think that rates will hold steady within the next month and a half -- 50% voted rates would remain unchanged (plus or minus 2 BPS), 33% predicted an upturn and the remaining 17% voted for a downturn.


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