Mortgage and housing are back in the spotlight like never before. Everywhere you look there are silver linings, lights at the ends of tunnels and ‘mustard seeds’ of hope. This is all great — I encourage hope as a broader theme in life. But ‘hope’ should not be the primary metric in an important business or investment decision — most analyst and media have based their mortgage and housing analysis primarily on ‘hope’ for the past two years.
Since conforming mortgage rates (= or <$417k) fell from 5.875% – 6.125% in November to the 5% to 5.25% range today, there has been increasing hype surrounding the weekly mortgage applications survey. In the past, this has been a decent measure of future refi and purchase loan fundings but not any longer.
In mid-December, a weekly release was put out that citing results that compared with 5-years ago. The bottom calling rush was on. The end result was scores of media, economists and analysts calling for the ‘great refi-boom’ to carry the nation out of its housing crisis and onto great things.
Of course, the primary thesis was that ‘if the refi market is at the same pace as 2003 then what followed 2003 in housing, mortgage and the macro economy may follow’. This is not the case. The fact is that refi loan application counts are far fewer than 2003 levels and actual loan fundings far less than that. Data being represented in this manner have led to several disappointments over the past two years. The fall out makes for less trust and weaker markets.
Does anyone really believe that with 60% of CA, AZ and FL home owners and over 90% in NV in or near negative equity that refi’s can be anywhere near 2003 levels?
By virtue of the headline number being ‘near 2003 levels’, it highlights the imperfections with the survey. Remember, at the end of 2003 the nation was in the midst of a mad refi and purchase boom and the first few innings of the ‘Great Bubble’. Rates on intermediate-term interest only ARM money were in the 4%’s, fixed were in the 5%’s. Everyone could get and loan because of easy qualifying and stated income and there was no negative-equity — 70% to 80% of all loan applications actually funded compared to 35% to 45% today.
Mortgage applications have increased in recent weeks and subsequent fundings will as well…there is little doubt about that. Some will be able to do well taking advantage of today’s low rates, which is great for those individuals. But is putting the home owner who is already in a great position into a little better position really going to do much for the broader housing market and economy? The fact remains that for the majority, those that don’t need the credit can get it and those that do can’t.
Housing is in the perfect credit crisis storm; one which low rates alone can’t ‘fix’ nor provide much protection. Mid-year 2007 when it was plainly obvious that unless something was done immediately the fall-out could be devastating — this measure may have made the difference between a housing recession and absolute implosion. Instead we heard ‘contained’ rhetoric for over a year.
Now with home prices at the median down 50% in the bubble states so vital to the nation’s economy and $9 trillion in guarantees made to most every other sector but residential real estate, the move is a day late and 5% short. As a matter of fact, even if rates were zero, it could not help the borrowers that need it the most.
The TRUTH About Mortgage Applications
The weekly survey only covers the top 10 lenders by volume
Back in 2003 through 2007, there were hundreds of national lenders. The top 10 were a driving force then but today the top 10 do the lion’s share of all loans. Therefore, even though the top 10 lender’s volume maybe equal to 2003, total national application volume is far less.
Portfolios shift from one lender to the next as rates fall – double, triple, quadruple counting
Most banks will not just roll-down a rate lock to current market if rates tumble after the borrower locks in. Some will but at a large fee. Rates tumbled a few separate days on news events in December and then backed up over subsequent days. On days when rates tumble, borrowers and brokers re-lock their loans with other banks in order to get a rate better than the one they have locked in — entire portfolios can switch lenders multiple times.
Therefore, much of last week’s jump in mortgage applications was much of the previous month of already counted loan applications switching to different lenders for the best rate. Many borrowers have four or five loan applications going with different banks simultaneously. These are all counted in their respective weekly surveys.
With three to four week underwriting and six to eight week total turn times to get a loan done right now, borrowers and brokers are not loyal to the lender at which their loan is in process making it very easy to switch. Ironically, a major reason for the long turn-times in getting a loan done is because of the long-turn times. Obviously, banks can lose a lot of productivity and revenue when losing loans worked for weeks during these volatile times. Additionally, when banks have no clue about what in their pipeline is real or what will actually fund, it is nearly impossible to hedge with any accuracy and can lead to incredible losses.
Loan applications do not necessarily lead to fundings. The overall fall-out rate is at an all-time high.
Back in 2003-2007 due to the variety of loan programs and easy approvals, 70%-80% of all applications actually funded. During these times, tracking the weekly survey was valuable. Now, 35-45% fund. Even less fund when rates are highly volatile due to the reasons explained in the previous bullet point.
The primary reasons for fall-out during 2008 were because a) the property value is too low b) the borrower does not qualify due to today’s sensible standards c) the rates are not really as low as the borrower has heard advertised by the media for their specific case d) and there is nothing in the Jumbo arena that makes sense for anyone.
Middle-market mortgage bankers are not pulling their weight leading to fewer fundings – they may never be able to
From HousingWire – As Refi’s Swell, Is There Enough Credit
The volume of warehouse credit providers has fallen recently from 30 to about 10, according to an article featured last week by American Banker, raising the question as to whether there is enough warehouse capacity to handle a refinance boom that has clearly surfaced in the past week.
“[I’m] not sure what mortgage companies are going to do, but there is no way all these loans will get funded any time soon with no warehouse money,” said one of HW’s sources, a mortgage banker who spoke on condition of anonymity.
A better gauge of mortgage applications
Lastly theMaxx, a research firm that I rely upon to gain more clarity on the real mortgage application counts, confirmed my research in its 12-22 issue. TheMaxx eliminates all multiple applications. They show applications only up 1.4% week over week. More importantly, theMaxx is at 158 today after this surge in applications and got in the 300’s back then. When you consider that back then 70-80% of all applications funded and now 35-45% fund, you see how bleak the picture is. Apples to apples, actual refi loans are down at least 60% at best.
In summary, The reporters covering the weekly survey must be getting analysis and PR help from the now infamous Lawrence Yun or David Lereah. This is just another example of why you have to throw out everything you thought you knew about mortgage and housing — very little that excite the markets are actionable in reality. -Best Mr Mortgage
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