Mortgage Applications in U.S. Climb as Low Interest Rates Fuel Refinancing

The number of mortgage applications in the U.S. increased last week, propelled by a surge in refinancing as borrowing costs hovered near record lows.

The Mortgage Bankers Association’s index rose 13 percent in the week ended Aug. 13, the Washington-based group said today. Refinancing jumped 17 percent to reach the highest level since May 2009, while purchases fell 3.4 percent.

The drop in rates that is prompting Americans to lower monthly payments, is doing little to spur sales as unemployment holds close to a 26-year high. Federal Reserve policy makers last week said they will maintain holdings of securities to prevent money from being drained out of the financial system in a bid to keep borrowing costs low and revive economic growth.

“With the unemployment rate holding near 10 percent, it’s not a good time to go out and buy,” Scott Anderson, a senior economist at Wells Fargo Securities in Minneapolis, said before the report. “Where we are seeing a little more activity is on the refinance side.”

The average rate on a 30-year fixed mortgage rose to 4.60 percent after reaching 4.57 percent the prior week, the lowest in data going back to 1990.

At the current rate, monthly payments for each $100,000 of a loan would be about $513, or $33 less than a year ago when the rate was 5.15 percent.

Mortgage Rates

The average rate on a 15-year fixed loan rose to 3.99 percent from 3.95 percent, and the rate on a one-year adjustable fell to 6.90 percent from 7 percent.

The share of applicants seeking to refinance a loan rose to 81.4 percent, the highest since January 2009, from 78.1 percent the prior week, today’s report showed.

Builders are reining in construction as sales languish. The number of single-family homes started last month dropped to the lowest level in a year, a Commerce Department report showed yesterday. Building permits, a sign of future construction, also decreased.

“The next 12 to 24 months will be challenging in the homebuilding industry,” Donald Tomnitz, chief executive officer of D.R. Horton Inc., the second-largest U.S. homebuilder by revenue, said on an Aug. 3 conference call with investors.

The flood of refinancing is influencing markets. Government-backed mortgage bonds are underperforming Treasuries amid concern the record-low borrowing costs are leading to acceleration in refinancing. In addition, the inability of some homeowners to qualify for new Fannie Mae and Freddie Mac loans is raising speculation the U.S. will loosen rules, punishing more bondholders as higher yielding mortgages disappear.

Obama’s Plan

The Obama administration will offer $1 billion in zero- interest loans to help homeowners who’ve lost income avoid foreclosure as part of $3 billion in additional aid targeting economically distressed areas.

The Department of Housing and Urban Development plans to make loans of as much as $50,000 for borrowers “in hard hit local areas” to make mortgage, tax and insurance payments for as long as two years, according to an Aug. 11 statement. The Treasury Department will also provide as much as $2 billion in aid under an existing program for 17 states and the District of Columbia, according to the statement.

To contact the reporter on this story: Courtney Schlisserman in Washington at cschlisserma@bloomberg.net

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