Larger loans have been appearing more frequently in the Mortgage Bankers Association (MBA) weekly surveys. Some analysts say that this reflects the greater percentage of adjustable-rate mortgages in the surveys. As ARMs tend to have considerably higher loan balances versus their fixed-rate counterparts, any rise in the percentage of ARMs included in the survey will cause the average loan size to increase as well.

Lehman Brothers recently noted the increase in the average size of refinanced loans seen in the MBA Weekly Survey. The larger loans in the survey include both ARMs and fixed-rate mortgages.

The average loan size of an ARM application is nearly $300,000 compared with only $170,000 for fixed-rate loans. Looking at year-over-year data compared with February 2003, the average loan size in the Refinancing Index has risen by $10,000. But the loan size of fixed-rate mortgages has stayed the same, and the rise can only be explained by the increase in the percentage of ARMs, said Lehman.

The amount of ARMs originated in any period is dependent on the number of purchase borrowers. Despite the inverted yield curve, the amount of ARMs in the purchase sector in 2000 exceeded 50%. It is estimated that under a scenario where 50% of applications are purchase loans (which is currently the case), ARMs should comprise only 30% of the MBA survey.

Is the larger percentage of ARMs in the MBA survey an indication of more refinancing activity in this sector? Lehman thinks that this increase in ARMs is simply a result of growth in the sector and not an indication of more fixed to ARM refinancings. The main driver of this type of refinancing is the slope of the yield curve. The modest spread differential between 30-year and 5/1 hybrid rates is not enough to cause even a 10% movement into ARMs, the bank argues.

Jay Brinkmann, vice president of research and economics at the MBA, said that it is not clear whether the larger ARM balances are having a disproportionate effect on the refinancing numbers, as these results tend to be dominated by fixed-rate mortgages.

However, Brinkmann said, given the smaller rate moves witnessed recently, larger loans have more of a refinancing incentive compared to the smaller loans. The larger loans with more refi incentive are probably pulling up the average, he said. He added that the upward trend in home prices has driven loan amounts across markets - including the ARM sector - higher.

Other analysts believe the increased average loan size is a reflection of increased cash-out activity. With house-price growth remaining strong in the last three to four years, homeowners have taken out larger loans to access the increased equity in their homes. This has enabled them to pay for other expenses such as college tuition as well as to pay for other higher-interest debt.

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