Mortgage Applications, Refis Hurt by Job Market Stagnation

Mortgage applications and refinancing is being hurt by high unemploymentMinnesota homeowner Matt Kreger refinanced his $168,000 mortgage into a 4.75 percent 30-year fixed-rate three weeks ago, to get out of a 5-year, interest-only ARM with a 5.7 percent rate, which was set to change at the end of September.

Borrowers such as Kreger were part of a push before Labor Day to close on the greatest number of mortgage purchase applications since May. And, new mortgage data indicates, just before interest rates on 30-year and 15-year loans increased slightly last week. The Mortgage Bankers Association reported a 6.3 percent increase in purchase applications over last week's data, which revealed a 37 percent drop compared to the same week in 2009. This week's numbers show that purchase applications are 38.8 percent lower than the same week one year ago.

"My payment is about the same, only $50 more, but I am paying more toward principal," says Kreger, of Eden Prairie, who works in the residential new construction and remodel industry.

Kreger also is maintaining a second mortgage of $35,000 at 7.875 percent that he couldn't refinance. "My mortgage is upside down," he says. "So I still have the two loans, which sucks." In order to refinance both loans into one, "I would've had to bring $30,000 to the table," he adds. "I was not going to liquidate all of my assets to refinance my house, especially not with my industry. I am lucky to have a good salary, but we are doing more work on smaller jobs and not making as much money as we used to make."
The refinance share of mortgage activity slightly decreased to 81.9 percent of total applications from 82.9 percent the previous week, as refinance volume dropped last week for the first time in six weeks, but still dominates the share of mortgage applications.

"Refis dominate the market because most buyers took advantage of the tax credits, which required a purchase agreement to be signed by April 30," says Minneapolis-area mortgage broker Jay Dacey. "Most buyers right now are investors and many of them all-cash types."

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The four-week moving average is up only 1.3 percent for the seasonally adjusted Purchase Index, while this average is up 5.0 percent for the Refinance Index.

The job market definitely is impacting the mortgage applications, says David Adamo of Luxury Mortgage in New York City. "The high percentage of the refi volume is more of a reflection of the homebuyers pausing and waiting for the employment situation to improve," he says. "They are less interested in home buying while they have less stability in their jobs."

The uptick in purchase activity, however, is a result of the historically low interest rates, he says. "July and August settled down a bit after the tax credits expired, and just recently the purchase application volume has picked up because of the extremely low rate environment we are in."

The average contract interest rate for 30-year fixed-rate mortgages increased to 4.50 percent from 4.43 percent, with points decreasing to 0.96 from 1.34 (including the origination fee) for 80 percent loan-to-value ratio loans. The effective rate decreased from last week.

The average contract interest rate for 15-year fixed-rate mortgages increased to 4.00 percent from 3.88 percent, with points decreasing to 0.87 from 1.45 (including the origination fee) for 80 percent LTV loans. The effective rate decreased from last week.

The average contract interest rate for one-year ARMs increased to 7.00 percent from 6.95 percent, with points decreasing to 0.21 from 0.23 (including the origination fee) for 80 percent LTV loans.

The adjustable-rate mortgage share of activity remained unchanged, at 6.1 percent of total applications, from the previous week, according to MBA data.

"Potential homebuyers who have been sitting on the sidelines will have to recognize that we are essentially at a bottom level of waiting for interest rates to go even lower when the prospect is still there that interest rates will start going back up," says Adamo.

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