Debt downgrade brings surging rates, falling application volumes

The U.S. credit downgrade left its mark on mortgage lending last week, as rates increased across all categories and suppressed home-loan demand, according to the Mortgage Bankers Association.

"Not surprisingly, mortgage applications continued to decline given these higher rates, with overall application counts falling for the third consecutive week, as both purchase and refinance activity declined," said Joel Kan, MBA vice president and deputy chief economist, in a press release.

The MBA's Market Composite, a measure of weekly application activity based on surveys of the trade group's members, headed downward by a seasonally adjusted 3.1% for the period ending Aug. 4. A week earlier, the index slipped by a similarly sized 3%. On a year-over-year basis, volumes were 30.5% lower. 

Average mortgage rates increased across all categories among MBA lenders, with the 30-year fixed average for conforming loans surging by 16 basis points to 7.09%, the highest level since last November. A week earlier, the rate came in at 6.93%. Borrower points also rose last week to 0.7 from 0.68 for 80% loan-to-value ratio loans.

Thirty-year mortgages sponsored by the Federal Housing Administration took an even larger leap of 17 basis points to land at its highest point since 2002 — 7.02% — up from 6.85% in the prior survey. Points increased as well to 1.14 from 1.05.  

The average rate of the 30-year jumbo loan, for mortgages with balances above the conforming amount of $726,200 in most markets, similarly surged to 7.04% from 6.89% seven days earlier, with points rising to 0.66 from 0.58 amid ongoing contraction of available credit for larger-sized loans.

"Treasury yields rates rose last week, and mortgage rates followed suit, due to a combination of the Treasury's funding announcement and the downgrading of the U.S. government debt rating," Kan said. The MBA echoed findings from government-sponsored enterprise Freddie Mac, who attributed rising interest rates last week to the evaluation from Fitch Ratings. Freddie Mac is due to report new weekly data from its own rate survey on Thursday. 

The effect of the credit-rating decision helped drive the Purchase Index to a 2.7% drop for the week on a seasonally adjusted basis, while compared to activity during the same period in 2022, volumes ended up 27% lower. "The purchase index fell for the fourth consecutive week, as homebuyers continue to struggle with low for-sale inventory and elevated mortgage rates," according to Kan.

The Refinance Index, likewise, pulled back 4% and finished 37.2% lower from the survey of a year ago. The weekly fall led refinances to a smaller share of overall application activity, inching down minimally to 28.7% from 28.9%.

The average refinance size, though, grew by a fraction, with the mean amount inching up to $256,800 from $256,000 the prior week. The increase was more than offset by a 1.7% decline in the average purchase size, which fell to $416,400 from $423,400. The overall average recorded across all applications dropped 1.2% to $370,600 compared to $375,100 seven days earlier. 

Despite the hit that higher rates continue to land on affordability, FHA-backed purchases, typically used by new home buyers for starter homes, still managed to register a seasonally adjusted uptick last week, bucking all other trends among government sponsored and conventional activity. While the Government Index decreased overall, the federally guaranteed share of home lending grew, in part thanks to FHA purchases.

Mortgages backed by the agency snagged a 13.6% share relative to total application volume, up from 13.3% one week prior. Department of Veterans Affairs-sponsored home loans garnered 11.8% compared to 11.6% in the previous survey. The share of applications coming through U.S. Department of Agriculture programs, however, contracted to 0.4% from 0.7% a week earlier.

Although it didn't accelerate to the same degree as it did for longer-term mortgages, the contract average for a 15-year fixed loan jumped 12 basis points to 6.51% from 6.39% one week earlier. Points used for 80% LTV loans increased to 0.92 from 0.78.

The 5/1 adjustable-rate contract average saw the largest upswing among the loan categories reported by the MBA, clocking in 18 basis points higher at 6.36%, compared to 6.18% in the prior survey. Borrower points also rose to 1.2 from 1.16. 

Adjustable-rate mortgage applications also managed to grow their share to 6.9% of total weekly volume, increasing from 6.5% a week earlier.