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Government Applications Increase Ahead of Higher FHA Premium

Mortgage applications rose 4.8% in the week ending March 30 with both refinancing and purchase activity higher.

The Mortgage Bankers Association (MBA) reported that the Refinance Index rose for the first time in six weeks by 4.0% to ~3576. However, as a percent of total applications, refinancing share slipped to 71.2% from 71.9% and is at its lowest level since late July 2011.

Meanwhile, the Purchase Index jumped 7.2% to 205, its highest level since early December. Michael Fratantoni, MBA vice president of research and economics, said that "applications to buy a home picked up last week, and are running more than two percent above the level reported at this time last year. Home purchase applications for conventional loans are now about 10 percent above last year's level."

He added that,"Applications for government loans increased by more than 10 percent over the week, for both purchase and refinance, likely spurred by borrowers seeking to apply before scheduled increases in FHA mortgage insurance premiums at the beginning of April."

The annual insurance premium will increase 10 basis points, while the upfront premium will jump 75 basis points to 1.75%. This would be effective for cases assigned beginning April 9 on new loans or refinancing of loans closed after June 1, 2009.

These developments are expected to result in a near-term pop in Federal Housing Administration speeds later this spring with borrowers rushing to start the refinancing process by April 9.

In a previous report, Amherst Securities Group expect that loans with cases assigned April 5, 2010 through October 3, 2010, specifically, will likely react strongly to avoid the increase. They said that following the FHA's six-month lockout on a streamline refinance following origination, rates were not as attractive for this group of borrowers as current levels. This has potentially prompted a stronger response.

Supporting the increase in refinancing activity was a decline in mortgage rates. The MBA's report noted the 30-year fixed rate contract rate for conforming loans averaged 4.16% compared to 4.23% in the previous week, while FHA rates were at 3.89%, down seven basis points.

For the month of March, refinancing activity declined 16% on average from February as mortgage rates averaged 3.97% compared to 3.89%. This will contribute to a slowing in prepayments in April (reported in May) along with a lower number of collection days. Currently, the outlook is for speeds to decline 5% on average following a projected increase of 10%-15% in March.

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