US mortgage applications posted its worst loss since early February with a fall of 18.9% in the week ended June 26, according to the Mortgage Bankers Association. The index had recently come off its first gain in five weeks as applications climbed 6.6% in the prior week. Specifically, loans for purchases of homes fell 4.5% while refinancing took a large hit of 30%. Fixed rate applications declined 19% while those of adjustable rate fell 16.1%. The sharp declines come as rates remain near recent highs despite cooling slightly. The 30-year fixed rate mortgage came in at 5.34% versus a previous 5.44%, while the 15-year loan dipped to 4.81% from 4.93%. While borrowing costs remain higher than they were just in the previous month, the release carries concern given the enormity of declines seen. The refinancing index has fallen sharply from early April levels near 7,000 to just 1482.20, its lowest since November. Meanwhile, the purchase index, at 267.70, remains just slightly above a double bottom low at approximately 235 in February.
The Federal Reserve and US Government have taken considerable steps to abate weakness in the housing market. Measures including quantitative easing in the purchase of $300 billion of government securities and 80% control of mortgage giants Fannie Mae and Freddie Mac have led to a decoupling of rates from the close relationship it has normally held with the 10-year government bond. For much of April and May, mortgage rates held around 4.50% for the 30-year loan while government yields saw a significant jump from around 2.70% to over 3.50% before the end of May as equities rallied amid a flight away from risk aversion. Recently however, mortgage rates has seen a sharp rise as the figure "plays catchup" to the market and Federal efforts begin to lose steam. Refinancing may continue to decline as a proportion of total applications, now down to just 46.4%, as demand weakens. Should this trend continue, economists will watch closely for renewed downside in the housing sector, including rising foreclosures and lower prices. This could translate into more losses for regional and national banks, though it is not likely to threaten the viability of these institutions as capital ratios are at the highest in years.