As expected, mortgage application activity declined last week as mortgage rates moved higher. The Mortgage Bankers Association reported that its Refinance Index was off 3% to 1863 while the Purchase Index fell 6% to 438. Despite the decline in the Refinance Index, activity remains relatively strong considering the level of rates. For example, last June 2004, when mortgage rates were at similar levels, the Refinance Index was around the 1400 area.
In a recent report, UBS analysts said one reason is the proliferation of option ARM products offering attractive teaser rates with low minimum monthly payments. Countrywide Securities analysts also report that origination in conforming balance fixed rate I/O loans has grown "to significant proportions" in the past few months. For example, at the start of this year, Countrywide's fixed rate I/O production as a percentage of total conforming fixed rate mortgages was around 1%. Currently, it is running at over 6%, and analysts believe the percentage could readily represent 10% or more of fixed rate production by mid next year.
"Increased production in interest-only fixed-rate mortgages has been the result of two major trends over the last year and a half: borrowers' increased demand for affordability' and payment management' products, and the pronounced flattening of the yield curve," Countrywide analysts said.
Meanwhile, the MBA also reported that as a percentage of total application activity, refinancings increased to 43.6% versus 42.5% in the previous report. The ARM share was essentially unchanged at 29.4% versus 29.5% the prior week.
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