The Mortgage Bankers Association (MBA) recently reported that total mortgage application volume fell 2.7% from the previous week, with the seasonally adjusted tally close to 12% less than one year ago. Home loan applications are up 5% from a year ago yet decreased 2% for the week.
With home prices that are rising faster than incomes and mortgage rates nearly three-quarters of a point higher than just a few months ago, new borrowers are on the hunt for the best deal they can get on home loans. The fact that government-insured FHA rates rose last week coupled with insurance premiums that remain higher than before the recession, FHA’s advantage of a lower mortgage down payment isn’t enough to lure the majority of borrowers it once did.
As a result, new borrowers are now turning their attention to shorter-term, adjustable-rate loans, which are currently offering lower interest rates. The share of total mortgage applications for adjustable-rate mortgages (ARMs) has doubled to 9% since November of 2016, reaching the highest level since October of 2104.
“Homebuyers in a strong housing market are looking for ways to extend their purchasing power, and adjustable-rate mortgages are one way to do that,” said Mike Fratantoni, MBA’s Chief Economist. “While the ARM share got as high as 35% pre [housing] crisis, it is really unlikely it will get nearly as high now given [newly instituted] regulations, which effectively prohibit many types of ARMs that were prevalent then.”
Higher interest rates are taking a toll on the refinance pool as well. Refinance applications dropped 3% for the week, a decrease of 26% from one year prior. Demand for housing is strengthening as the spring market revs up, but a contracted supply of homes for sale nationwide continues to slow the selling pace.
The upside may be more flexibility for borrowers struggling to meet underwriting requirements. “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.