Mortgage applications fell 2.6% despite rates falling
The MBA (Mortgage Bankers Association) Applications Index fell 2.6% last week after rising 2.9% the week before. Rates were increasing for most of the week, only to fall on Friday on the Brexit vote. Mortgage rates lagged the rally in bonds, which you can trade through the iShares 20+ Year Treasury Bond ETF (TLT). Thus, applications have been slow to reflect the new reality in the bond market.
We saw a bit of a spike in the number of mortgage applications at the beginning of the year. Since then, applications have fallen. Much of this has been due to a drop in refinances. While we’re seeing a small rebound, the above chart shows the continuation of depressed activity compared to normal levels. This doesn’t count the bubble years. We’re only marginally above the levels associated with the previous real estate bust in the late 1980s.
Government tries to help first-time homebuyers
Recently, the government made two big moves to try to help the first-time homebuyer. First, it brought back the 3% down conforming loan. It also gave homebuyers a break on mortgage insurance if they went through a counseling program. There are press reports suggesting that the government also plans to reduce loan level pricing on Fannie Mae loans for lower credit scores. Fannie Mae is rumored to be coming out with a no-credit score mortgage, as well.
There’s a push-pull effect going on. While the government would like to see more lending to low-income and poor-credit borrowers, regulators are aggressively going after banks and originators. This causes them to take less risk.
Impact of falling rates
Originators had a dismal 2014. The refinance market dried up, and the purchase market continued to fade. Last year was better, but not by much. However, 2016 is shaping up well. Originators have been given an unexpected gift of a global bond market rally. Most people in the industry expected 2016 to be a terrible year, with the Fed hiking rates and a lack of available inventory limiting the purchase business. While inventory is still tight, originators are picking up the refinance business. We could see 2016 turn out to be a decent year after all.
Mortgage REITs such as Annaly Capital Management (NLY) and American Capital Agency (AGNC) will be exposed to accelerated prepayments if activity picks up in the mortgage market. Investors might want to gain more exposure to credit risk through non-agency REITs such as Two Harbors Investment (TWO) and Nationstar Mortgage Holdings (NSM). Investors interested in gaining access to the mortgage REIT sector as a whole can look at the iShares Mortgage Real Estate Capped ETF (REM).
In then next part of this series, we’ll discuss mortgage purchase applications from last week.