Mortgage application activity declined 7.4% in the week ending March 16 as mortgage rates rose in response to the Federal Open Market Committee's more upbeat assessment of the economy. This muddies the odds that further quantitative easing will be required.
According to the Mortgage Bankers Association (MBA), mortgage rates moved to their highest level since December with the contract rate for 30-year fixed-rate conforming loans averaging 4.19% compared to 4.06% in the previous report; Federal Housing Administration rates gained 11 basis points to 3.93%.
In response, the Refinance Index fell 9.3% to ~3603, also its lowest level since December, while refinancing share as a percent of total applications dropped to 73.4%, its lowest level since last July, from 75.1%. The Purchase Index was also lower by 1% to 185.
Of particular interest to the mortgage market is HARP activity. "With rate/term refinances falling as we go forward, HARP will be a bigger percentage of refinances but will be more concentrated in certain states," noted Jay Brinkmann, MBA senior vice president of research and education. "Some of the largest institutions are reporting that the HARP share of their refinances remained at about 30% last week."
However, Home Affordable Refinance Program (HARP) volume is not equal across the country, Brinkmann said, and certain states that were hit the hardest in the housing crisis are showing the largest response to HARP.
"We saw big state-level differences in refinance applications for February over January: Florida was up 49%, Arizona was up 61%, and Nevada was up 71%. Refinances in the rest of the country were generally flat or even down," he said.
For example, Texas experienced no change, Colorado decreased 3%, Connecticut was up only 2%, and Virginia increased 1%. The program is "clearly is a driving force in those states that saw the most defaults and the biggest drops in home equity," Brinkmann explained.
The February prepayment report showed clear signs of HARP 2.0 activity and it is expected to be more pronounced in upcoming reports. The increase is based on a combination of factors including HARP changes being fully reflected in the GSE's automated underwriting systems in March and broader servicer participation and depth along with increasing efficiency.
Credit Suisse analysts expect the full ramp-up of HARP 2.0 will occur over the next two months, while Bank of America Merrill Lynch analysts believe HARP response will be more noticeable in 5.0s and 4.5s.
While there are more HARP-able borrowers in the super premium cohorts, BofA Merrill noted, many are hampered by the requirement that they "must be current on their mortgage payments with no late payment in the past six months and no more than one late payment in the past 12 months."
Barclays Capital analysts added that in conversations with servicers it seems income verification continues to be a significant hurdle as well, particularly for the higher coupons.
Overall, Barclays analysts think the HARP effect is likely be a "lumpy" affair as servicers implement HARP 2.0 on difference timelines. "As a result, the HARP prepayment effect is likely to be uneven when viewed on a month-to-month basis."