Rise In Refinance Demand Tempered By Appraisal Issues

by devteam May 26th, 2010 | Share

The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending May 21, 2010. 

Michael Fratantoni, the MBA's Vice President of Research andEconomics says:

Refinance application volume jumped last week as continuing financialmarket turmoil related to the budget crises in Europe extended theopportunity for homeowners to lock in at historically low mortgagerates…In contrast, purchase applications fell further this week,following last week's sharp decline, keeping the purchase index at13-year lows.”

The Mortgage Banker's application survey covers over 50% of all US residential mortgage loan applications taken by mortgage bankers, commercial banks, and thrifts. The data gives economists a look into consumer demand for mortgage loans. In a low mortgage rate environment, a trend of increasing refinance applications implies consumers are seeking out a lower monthly payment which can result in increased disposable income and consumer spending (or give consumers a chance to pay down other debts like credit cards). A rising trend of purchase applications indicates an increase in home buying interest, a positive for the housing industry and the economy as a whole.

From the Release…

The Market Composite Index, a measure of mortgage loan application volume, increased 11.3 percent on a seasonally adjusted basis from one week earlier.  On an unadjusted basis, the Index increased 10.3 percent compared with the previous week. The four week moving average for the seasonally adjusted Market Index isrn up 4.4 percent.

The Refinance Index increased 17.0 percent from the previous week. This third consecutive increase marks the highest Refinance Index recorded in the survey since October 2009. The four week moving average is up 11.5 percent for theRefinance Index.

The refinance share of mortgage activity increased to 72.2 percent oftotal applications from 68.1 percent the previous week, which is thehighest refinance share observed in the survey since December 2009.

The seasonally adjusted Purchase Index decreased 3.3 percent from one week earlier and is the lowest Purchase Index observed in the survey since April 1997. The unadjusted Purchase Index decreased 4.0 percent compared with the previous week, was down 27.1 percent over the past 4 weeks, and was 27.5 percent lower than the same week one year ago.  The four week moving average is down 7.2 percent for the seasonally adjusted Purchase Index.

The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.80 percent from 4.83 percent, with points remaining constant at 1.08 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.  This is the lowest 30-year fixed-rate recorded in the survey since the week ending November 27, 2009. The effective rate also decreased from last week.

The average contract interest rate for 15-year fixed-rate mortgages increased to 4.25 percent from 4.19 percent, with points decreasing to 1.00 from 1.36 (including the origination fee) for 80 percent LTV loans. However, due to the decrease in points, the effective rate decreased from last week.

The average contract interest rate for one-year ARMs increased to 6.83 percent from 6.81 percent, with points increasing to 0.38 from 0.37 (including the origination fee) for 80 percent LTV loans.  The adjustable-rate mortgage (ARM) share of activity decreased to 6.0percent from 6.3 percent of total applications from the previous week.

If you missed the wake up call presented by loan application demand last week: HERE IT IS

This week's read on the purchase market is consistent with anecdotal accounts offered by the MND community and our own industry contacts. Loan writers are generally busy trying to get their homebuyer tax credit files through underwriting and closed before the June 30 deadline—however new purchase applications have flatlined. This does not come as a surprise to anyone. 

The rise in refinance applications is also consistent with anecdotal accounts offered by the MND community and our own industry contacts. As a flight to safety drove mortgage rates lower and lower over the past few weeks, originator phones rang progressively louder. This is great news as it implies consumers areseeking out a lower monthly payment which can result in increaseddisposable income and consumer spending.

Unfortunately, a loan application does not equal a closed loan and there are a few roadblocks pressuring pipeline fall out higher.  We're hearing complaints SPECIFICALLY about appraisals.

Borrowers looking for a lower rate are not qualifying for an agency loan product because their home value doesn't support a rate/term refinance. Some say the AMCs are lazy and have no incentive to care whether or not their choice of comps accurately supports value. Others are a bit more quantitative in their approach and point toward an increase in foreclosure rates as the true culprit. 

On one hand we know that most qualified appriasers are not working for AMCs because they don't earn a full paycheck from their 1004s….which implies the AMCs are operating with a junior varsity squad of collateral appraisers. This stance is however hard to qualify as most of the horror stories we hear come from loan originators who just had their deal shotdown by a shoddy appraisal. The theory is hard to overlook though.

On the other hand banks are picking up the pace of foreclosures. For the most part banks delayed the liquidation of their 120+ delinquent loan holdings to give HAMP a fair chance to work its intended magic. On Monday we learned that total housinginventory at the end of April rose 11.5 percent to 4.04 millionexisting homes available for sale. Now that the sun is setting on HAMP…banks are done waiting around and shadow inventory is becoming real inventory at a faster pace…

Plain and Simple: Bank foreclosure activity is putting more distressed inventory on the market and making it harder for appraisers to justify their choice of comps. It's a buyer's market…distressed sales will continue to drive collateral values lower, especially in highly concentrated areas of foreclosures. So while refinance applications are higher…we gotta get'em qualified and closed before we can start adjusting prepayment speeds higher.

While it may be a mortgage professional's first instinct to blame appraisers who didn't dig deep enough to determine fair market value, in many cases this may be an unfair assumption.

Appraisers must know their market, they must research each active listing and sale to determine what is driving home prices in that specific area. If short sales and foreclosures are predominant, we shouldn't be criticizing the quality of appraisals. If the appraiser simply used the last four sales in the market as comps or just missed recent sales that were not aforeclosure or a short sale, then an originator is justified in questioning value. 


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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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