Debt fight contributes to higher rates, lower mortgage activity

Home loan applications dropped for a second week in a row, as concerns over debt-ceiling negotiations helped drive interest rates up, the Mortgage Bankers Association said.

The MBA's Market Composite Index, a weekly measure of application activity based on surveys of the trade group's members, fell a seasonally adjusted 4.6% for the period ending May 19, after a 5.7% decrease seven days earlier. Application volumes also sat 35% below levels during the same time frame in 2022, with both purchase and refinance activity lower last week.

"Investors remained attuned to the uncertainty around the U.S. debt ceiling and communication from several Federal Reserve officials last week, which sent Treasury yields higher, along with mortgage rates," said Joel Kan, MBA vice president and deputy chief economist, in a press release.

The 30-year contract fixed rate for conforming mortgages with balances below $726,200 jumped up 12 basis points to an average of 6.69%, its highest point since March, compared to 6.57% a week earlier. Meanwhile, borrower points increased to 0.66, up from 0.61 for 80% loan-to-value ratio loans. 

At the same time, the 30-year jumbo average for loan balances above the conforming amount made a similar 11 basis points leap to an average of 6.57%, up from 6.46% seven days earlier. Points also increased to 0.57 from 0.38.

Although rate uncertainty is causing any consumers to hold back on taking out new home loans, the sluggish housing market is having a larger impact on borrowing volumes, the MBA said at its secondary market conference this week. Housing researchers have consistently reported a dearth of inventory in 2023, largely resulting from homeowners' reluctance to move and give up interest rates they currently hold. Federal Reserve officials are also dropping hints that the federal funds rate, which banks use to lend to each other, is likely to remain elevated for the rest of 2023.   

"Since rates have been so volatile and for-sale inventory still scarce, we have yet to see sustained growth in purchase applications," Kan said. The seasonally adjusted Purchase Index slipped 4.3% week over week, while on an annual basis, volumes were 29.8% lower.

Interest in the new-home market is growing, though, providing some opportunities for aspiring buyers, MBA data showed last week. U.S. government research released on Tuesday echoed the MBA's findings, with a report showing sales of new single-family houses increasing between March and April, while their average prices came down.

The current meager supply of existing homes means average prices and loan sizes have failed to drop significantly in 2023, though, even as rates stay elevated. Last week, the mean purchase amount on new applications inched upward, rising 0.4% to $442,000 from $440,400 in the prior survey. 

Average refinance sizes, likewise, edged up 0.1% to $265,100 from $261,300. Across all applications, the overall average came in at $393,600, 0.6% above the prior week's $391,300.

While purchases are not picking up this year, refinance activity is even slower. "Activity remains limited, with the Refinance Index falling to its lowest level in two months," Kan said. 

The Refinance Index dropped 5.4% compared to a week earlier and finished 44.2% below its reading of a year ago. Refinances relative to overall volume remained at 27.4%, the same share they held seven days earlier.

Although average loan amounts inched higher, the share of federally backed mortgages, which borrowers typically use to acquire lower priced units, increased compared to one week prior, with the Government Index dropping less steeply than conventional activity. 

Federal Housing Administration-backed applications increased to a 12.5% share from 12% a week earlier. The portion of loans guaranteed by the Department of Veterans Affairs also came in at 12.5%, rising from 12.2% in the previous survey, while mortgages coming through U.S. Department of Agriculture programs grew to a 0.5% share from 0.4%.

Meanwhile, adjustable-rate mortgage activity accounted for a 6.7% slice of the market, the same as the previous week.

With concerns about the potential impact of a debt default top of mind, average interest rates headed upward in all other categories tracked by the MBA. The 30-year contract fixed rate for FHA-backed home loans surged 17 basis points to 6.56% from 6.39% week over week among association lenders. Points increased to 1.24 from 0.97.

The contract 15-year fixed mortgage rate saw an even larger 19 basis point rise and crossed over the 6% threshold. The rate averaged 6.15% compared to 5.96% in the previous weekly survey, while borrowers used 0.72 in points on average, up from 0.68 for 80% LTV loans. 

The average 5/1 ARM rate, which stays fixed for 60 months before adjusting to market benchmarks, also ended up higher, but rose at a more muted pace compared to fixed mortgages. The interest rate averaged 5.73% compared to 5.71% a week earlier. Points increased to 1.19 from 1.1.