Mortgage Volume Drops As Interest Rates Rise
According to the Mortgage Bankers Association’s weekly application survey, the volume of mortgage applications taken dropped an incredible 22.6% during the week ending February 15th as interest rates crept higher. This coinciding with a disturbing report from Freddie Mac claiming that adjustable-rate mortgages could become more popular as the difference between long-term fixed rates and adjustable rates increases.
Back in October Freddie Mac reported that Adjustable Rate Mortgages (ARMs) made up 17 percent of loan applications, their lowest level since June 2003. Back then the ARMs were being blamed for high foreclosure rates as many ARM programs offered low introductory teaser rates that quickly rose to payments that homeowners could no longer afford.
Back to today refinance applications took a dip as well (27.9%) as well as new purchase applications (11.55%).
It may not come as much of a surprise to hear that the rate increase has a direct effect on the volume of mortgage applications being taken, what is more surprising is that the current fallout is suffering from an unanticipated side effect. While the economy braces for the inevitable impact that will occur when subprime adjustable rate mortgages start resetting to much higher interest rates, many of these loans are already defaulting (well before the rates increase)!
Many of these mortgages are in default before the subrime rate hike even takes place thanks in part to a lending environment that simply did not discriminate. In other words many potential borrowers were able to get approved for loans that they simply could not afford (even with the initial rate that was sure to rise down the road).
Plus with no-money-down programs, many homeowners literally entered into the mortgage with absolutely no equity in the home to fall back on. The problem really compounded back in 2006 when home prices started to tumble. Not only were mortgages suddenly worth more than the house on which they were paying for, the fact that so few borrowers had any equity to tap into created a downward spiral that we’re just now feeling today.
The lenders are now being credited for ignoring this downward spiral back in 2006 when rather than raising borrowing standards; they continued to push risky loans. Why you ask? Simple- short term profits on initial interest.
The bad news is that things aren’t expected to improve any time soon either. After all, these troubles are in full swing and the rate spike on these ARMs hasn’t even kicked in yet.
