Record-Low Rates Do Little to Increase Mortgage Demand

Mortgage interest rates have been hovering at their lowest levels in decades, but that's done little to sway consumers to buy a home or refinance their mortgage to take advantage of the interest savings.

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The ""Mortgage Bankers Association"":http://www.mortgagebankers.org (MBA) reported Wednesday that for the week ending August 6, 2010, mortgage loan application volume remained relatively flat from the already-depressed level of the week before.

Total app volume increased just 0.6 percent from week-to-week. MBA's refinance index was up 0.6 percent, while the purchase index rose only 0.3 percent.

The poor weekly showing comes despite the fact that mortgage interest rates again hit new record-lows during the period.

MBA reported that the average contract interest rate for 30-year fixed-rate mortgages (FRMs) decreased to 4.57 percent, down from 4.60 percent the week before. This was the lowest 30-year contract rate ever recorded in the history of MBA's survey.

The average contract interest rate for 15-year FRMs dropped to 3.95 percent from 4.03 percent the previous week. And again, this was the lowest 15-year rate ever recorded by MBA.

""Freddie Mac"":http://www.freddiemac.com, too, has been tracking mortgage interest rates, and the GSE says we’re currently seeing the lowest conventional fixed-rates available in more than 50 years. So, why aren’t consumers taking advantage of today’s favorable and affordable market conditions?

The economists at Freddie Mac say that under normal circumstances, such low rates would support home purchases and generate substantial refinance activity. For example, they point to 2003, when mortgage rates hit the

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then-record low of 5.21 percent. At that time, nearly $4 trillion in new mortgages were originated, with refinances making up 70 percent or roughly $2.7 trillion.

But the nation’s recession and the subprime credit crisis “have left us with anything but normal conditions today,” Freddie’s economists said in commentary released Wednesday. They note that mortgage origination forecasts are well below half of what occurred in 2003.

One reason Freddie gives for the “missing” originations is that more and more people are paying in cash. The ""National Association of Realtors"":http://www.realtor.org reports that nearly a quarter of existing-home sales in 2010 have been all-cash transactions. Freddie says similarly, more than 20 percent of borrowers in the past few quarters have been paying down their principal balance with cash during a refinance.

A second reason why originations are lower than one might expect is that home value declines have eroded equity so much in some neighborhoods that the borrower no longer qualifies for a low-loan-to-value refinance, Freddie said.

Second liens are also posing a problem. Freddie’s economists explained that if the second lien is not paid off, then the second lien-holder will be requested to resubordinate their loan to the new (refinanced) first-lien loan. They say some potential borrowers have run into trouble getting second-lien lenders to submit the resubordination paperwork on time, in some cases forcing borrowers to forego refinance altogether.

Freddie says origination volumes are also running at low levels because home sales volumes are low. The GSE’s economists referenced the Conference Board’s Consumer Research Center Survey for July, which includes and index for “plans to buy a home within the next six months.” The index is at its third-lowest level since the survey began in 1978.

Freddie contends that potential homebuyers remain concerned by the possibility of continuing home value declines and are nervous about investing in homes, absent big incentives.

“Whether on-the-fence homebuyers and potential refinancers will soon take advantage of the historic opportunities presented by the lowest mortgage rates in five decades remains to be seen, but we’re not counting on a change anytime soon,” Freddie’s economists said in their report.