Foreclosure Crisis + Higher Rates = Fewer Mortgage Applications

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Dip in Mortgage Applications Reflects Foreclosure Crisis, Rising Interest RatesConsumers are pulling back on applying for mortgages to buy new homes or refinance their current houses, and while the foreclosure crisis may be playing a role in the decline, rising interest rates are also partly to blame.

According to the Mortgage Bankers Association (MBA), applications for mortgages declined 10.5% for the week ending Oct. 15, the biggest drop in four months. Applications for home purchases were down 6.6% compared to the previous week and declined nearly 30% compared with year-ago levels. Refinancing applications fell an even larger 11.2%. The association said that was likely linked to the fact that average rates on 30-year fixed mortgages increased from 4.21% -- the lowest level on record -- to 4.34% last week.

"Bigger picture, there may be a psychological component to this," says Michael Fratantoni, MBA vice president for research and economics. "It may be just another aspect of the uncertainty with respect to the mortgage market right now, and it may cause people to pause regardless of whether they are thinking about a purchase or refinance."

According to the MBA's latest statistics, about 80% of applications are for refinancing, and the remaining 20% are for home purchases. Of the latter amount, 20% to 30% are for distressed sales such as foreclosures.

A Foreclosure Market in Disarray

Whatever its impact on mortgage applications, the turmoil over allegations that big banks didn't follow proper legal procedures in processing foreclosures has been immense, prompting some major financial institutions, including JPMorgan Chase (JPM), to suspend foreclosures while they investigate what went wrong.

In addition, all 50 state attorneys general have announced investigations into whether the banks broke the law by signing hundreds of affidavits a day without verifying the information contained in the accompanying documents.

Bank of America (BAC) and GMAC, two of the country's biggest mortgage lenders, announced on Oct. 18 that they would resume making foreclosures later this month. BofA said it had checked more than 100,000 files and had found nothing wrong.

David Crowe, chief economist of the National Association of Home Builders, says BofA's decision to resume foreclosures is one of a number of factors that suggests the problem may be resolved more quickly than previously thought. Treasury Secretary Timothy Geithner said last week that the Obama administration opposed a nationwide moratorium on foreclosures.

"The housing recovery is in fragile condition right now, and any additional uncertainty does worry me and others in the housing market," Crowe says. 'If we can get rid of the uncertainty, then I think sales will be back on track. If it lasts a long time, it could have a significant impact on all sales."

But in New York State uncertainty is likely to rise in the near term because the state court system instituted new rules on Oct. 20 for lawyers handling foreclosures that will force a complete overhaul of standard practices. That puts nearly 78,000 foreclosures pending in New York on hold until the new rules get implemented at law firms statewide. And if other states follow New York's lead, the entire picture could change.

Hints of Optimism in Housing
At least new-home sales have begun to creep back up after falling off a cliff in May, when the federal government's homebuyer tax credits ended. New homes were selling at a 414,000 annualized rate in April, then slumped to 282,000 in May after the credit expired. In August, 288,000 new home were sold (the last month for which numbers are available).

Crowe says he's encouraged by the fact that single-family housing starts were up 4.4% last week, according to the Census Bureau. At the same time, an index of homebuilder sentiment edged up this week from 13 to 16 out of 100 -- still very low, but an increase nonetheless.

Says Crowe: "The survey suggests builders are seeing a little more activity from the consumer and that builders are confident enough to begin the start of a few more homes." If more folks started applying for mortgages, that would be an even better sign.

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