Stephanie Armour
USA Today
The number of home buyers applying for mortgages surged by a record amount last week in response to aggressive federal efforts to lower mortgage rates.
Mortgage applications more than doubled in the holiday week ended Nov. 28 vs. the week before, according to a report Wednesday by the Mortgage Bankers Association. The association’s index, a measure of mortgage application volume, was up 112% on a seasonally adjusted basis from the week earlier. And the refinance index lept 203%.
The record jump in applications comes as the average rate on a 30-year fixed-rate loan dropped to 5.47% last week, lowest since June 2005, from 5.99% the prior week. At the current rate, monthly borrowing costs for each $100,000 of a loan would be about $565.91, down $71 from three months ago.
“Interest rates fell way down. It’s because of the (federal) action to buy up Fannie Mae and Freddie Mac assets,” says Patrick Newport, an economist with IHS Global Insight. “I was surprised. This may have exceeded the Fed’s expectations. People are jumping into the marketplace.”
The government in November said it will buy up to $100 billion of direct debt of Fannie Mae and Freddie Mac and the Federal Home Loan Banks, and it will buy up to $500 billion of mortgage securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae. The goal, in part, was to lower mortgage rates on loans for home buyers by pumping cash into the mortgage market.
Those efforts have led to a significant drop in mortgage interest rates.
But despite the unprecedented surge in applications for home refinance and home purchase loans, economists caution that many hurdles remain before the housing market stabilizes.
The major challenges:
• A glut of unsold homes, which is continuing to drive down home values.
• A growing number of homeowners who owe more than their homes are worth. Nearly one is seven homeowners is underwater, which means they owe more on their mortgage than the home is worth. That’s about 12 million homeowners, nearly double the 6.6 million underwater at the end of 2007, according to Moody’s Economy.com. That significantly hampers the ability of legions of homeowners to refinance.
• Tighter lending standards mean even though applications for mortgages and refinancing may be up, that doesn’t mean those applications will be approved. To qualify, borrowers must meet ever stricter lending requirements and come up with higher downpayments.
In addition, mounting unemployment — the unemployment rate rose from 6.1% to 6.5% in October, and the next report by the Department of Labor is widely expected to be even more dismal — is undermining a housing recovery. Many who lose jobs are moving in with relatives or putting homes up for sale, adding to the glut of homes on the market.
“Homes on the market are still at an all-time high,” Newport says. “(The record number of applications) is good news, but over the next month, the housing market will continue to deteriorate.”