U.S. Mortgage Applications Index Drops 5.9% as Refinancing Gains Subside

Mortgage applications in the U.S. dropped from a six-month high as purchases fell and gains in refinancing subsided.

The Mortgage Bankers Association’s index decreased 5.9 percent in the week ended June 18. The Washington-based group’s purchase gauge declined 1.2 percent to the second-lowest level since 1997, while its refinancing gauge slid 7.3 percent from the highest reading since May 2009.

The housing market has cooled following an April 30 deadline for a tax credit worth as much as $8,000. The benefits of borrowing costs close to the lowest recorded, which spurred homeowners to refinance loans and trim monthly payments, are outweighed by concerns about unemployment and mounting foreclosures.

“Amid sluggish job growth, ongoing high foreclosures and the expired tax credit, housing is due for a sharp pullback,” Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, said before the report. “While record-low mortgage rates should provide some ballast, the market will remain fragile until employment strengthens and foreclosures abate.”

The share of applicants seeking to refinance a loan fell to 73.8 percent last week from 74.8 percent the prior week.

The average rate on a 30-year fixed loan decreased to 4.75 percent from 4.82 percent the prior week. Rates reached a record low of 4.61 percent in March 2009 after the Federal Reserve expanded a mortgage-purchasing plan aimed at reducing lending rates. The program ended in March of this year.

Mortgage Rates

At the current 30-year rate, monthly payments for each $100,000 of a loan would be about $522, down $42 from a year ago when the rate was 5.44 percent.

The average rate on a 15-year fixed mortgage dropped to 4.19 percent from 4.23 percent, and the rate on a one-year adjustable mortgage fell to 7.05 percent, from 7.07 percent.

The tax credit for first-time homebuyers, which was extended in November to include some current owners, required contracts be signed by April 30 and settled by June 30.

A report yesterday signaled demand is weakening more than anticipated. Purchases of existing houses, which are tabulated when a contract closes, unexpectedly decreased 2.2 percent in May to a 5.66 million annual rate, figures from the National Association of Realtors showed. A decline in home starts and building permits last month also reinforced the retrenchment.

Hovnanian Enterprises Inc., the largest homebuilder in New Jersey, said orders fell 17 percent in the quarter ended April 30 from a year earlier, and contract signings slowed in May, indicating the tax credit helped pull some sales forward.

Fed policy makers, completing their two-day meeting today, are forecast to commit to keeping interest rates near zero to help wean the world’s largest economy off government stimulus. The risk of renewed weakness in the industry that precipitated the worst recession since the 1930s, and low inflation, are among reasons central bankers will keep policy unchanged.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

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