Those Mortgage Numbers Aren't As Ugly As They Look

Judging by the weekly index of mortgage applications for home purchase compiled by the Mortgage Bankers Assn., the housing market is about to fall out of bed. At last count, the index was down 24% from its February high. And since mid-June, it has been running below year-earlier levels for the first time since a brief three-week period in 1992. Indeed, new home sales in June fell 8% below June 1993, though sales of existing homes were up 7%.

Don't panic, advises economist David Cohen of MMS International. He notes that the rebound in interest rates has boosted demand for adjustable-rate mortgages (ARMs), whose share of loans for single-family home purchases hit 36% in May, compared with 20% a year ago.

This trend, says Cohen, suggests that mortgage bankers, who are geared to originating fixed-rate loans for repackaging into mortgage-backed securities, are losing business to commercial banks and savings and loans. The latter institutions are more comfortable originating ARMs, often for their own portfolios. In fact, ARMs represented 65% of S&L originations in May, compared with 20% for mortgage bankers.

The upshot, says Cohen, is that the drop in the mortgage bankers' index probably exaggerates the developing weakness in the housing market.

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