Rates, Apps Fall

Reversing the upturn reported last week, the 30-year fixed-rate mortgage average of 5.57% fell six basis points within the past seven days, according to Freddie Mac’s latest Primary Mortgage Market Survey.

The average for the 15-year fixed-rate mortgage came in at 5.16%, also six BPS below last week’s average, Freddie said.

The 10-year Treasury note, which long-term mortgage rates closely follow, closed Thursday at a yield of 3.95% — but had been as high as 3.98% during trading — and price of 101.38, better than the 4.07% yield and 100.38 price a week earlier. The 10-year yield began its steep decline yesterday after the Bank of England cut interest rates — fueling global economic concerns.

Freddie chief economist Frank Nothaft noted that mortgage rates are even lower this month than they were in May and “aren’t expected to move too much in either direction any time soon.”

Accordingly, six out of 10 in Bankrate.com’s surveyed panel of industry brokers, bankers and individuals, thinks rates will stay about the same (plus or minus two BPS) over the next 35 to 45 days, while the rest predicted a decrease.

The 5-year Treasury-indexed hybrid adjustable-rate mortgage average reportedly slipped to 5.05% from 5.10% a week earlier.

The 1-year Treasury-indexed adjustable-rate mortgage average had the smallest weekly decrease — down two BPS to 4.23%. The index on the 1-year was 3.37% as of Wednesday, down two BPS from last week, the Federal Reserve reported in its Statistical Release.

The ARM share of activity was unchanged from the prior week at 31%, the Mortgage Bankers Association said.

Fitch Ratings announced this week that “burgeoning growth” in recent years in originations of negative amortization ARMs, or option ARMs, prompted it to revise its ratings criteria on such loans. Fitch said it now incorporates its research on negative amortization ARM historical performance and borrower repayment patterns, as well as a cash flow analysis using a formal interest rate stress protocol to more precisely measure the product’s risks — the primary one being payment shock.

With these loans, borrowers get to choose payment options each month, such as an interest-only payment and a minimum monthly payment. The options can cause the mortgage to negatively amortize and recast it to a larger payment in order to sufficiently amortize the mortgage, leaving borrowers at risk of payment shock, Fitch explained.

Standard & Poor’s also announced this week it would more closely scrutinize option ARM loans, and noted the greater payment shock with these loans increases the likelihood of foreclosure.

The prior week’s rate spikes chilled previously piping-hot application activity — as reflected in the 11% downturn in loan application volume, bringing the Market Composite Index to 786.8, according to MBAs latest application survey, which runs one week behind Freddie’s report. The index still stands higher than its measure of 601.2 at this time last year, despite that the 30-year was 68 BPS higher than its current average.

Pushing down weekly application activity, was a 9% decline in purchase money requests from the previous week’s record level and a 13% plunge in refinance requests. The refi share of applications edged down below 46%, MBA said.