November 3, 2010 / 11:03 AM / 9 years ago

US home refinancing demand drops despite low rates

NEW YORK, Nov 3 (Reuters) - U.S. mortgage applications for home refinancing loans fell last week even as interest rates held near-record lows, data from an industry group showed on Wednesday.

The housing market has been showing modest signs of improvement, with home sales picking up in many regions of the country, but tight lending standards and a weak labor market are preventing many consumers from taking advantage of rock-bottom rates.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications USMGM=ECI, which includes purchase and refinance loans, decreased 5.0 percent for the week ended Oct. 29. The four-week moving average, which smoothes the volatile weekly figures, was up 0.1 percent.

It was the sixth time in eight weeks that activity fell.

The MBA’s seasonally adjusted index of refinancing applications USMGR=ECI decreased 6.4 percent.

Tom Porcelli, head of U.S. market economics at RBC Capital Markets in New York, said the drop in demand is a reflection of the inability of many homeowners to take advantage of low interest rates.

“Lending standards are still stunningly tight,” he said in an interview before the release of the data.

“Consumers are in a de-leveraging mode, so buying a home could not be further from their minds right now, and this is what is keeping purchase applications low,” he said.

While demand for loans to purchase a home rose for a second straight week, activity was below where it was earlier in the month.

The MBA’s seasonally adjusted purchase index USMGPI=ECI, a tentative early indicator of home sales, rose 1.4 percent.


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Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.28 percent, up 0.03 percentage point from the previous week. Interest rates were also below their year-ago level of 4.97 percent.

In the week ended Oct. 8, the rate reached 4.21 percent, the lowest level in the survey, which has been conducted weekly since 1990.

Porcelli said “underwater” mortgages — where the amount owed on the mortgage exceeds the home’s value — are one of the biggest banes of the homeowners who want to refinance.

This negative equity makes many of them unqualified for home loan refinancing and prevents some from selling.

The MBA said fixed 15-year mortgage rates averaged 3.64 percent, down from 3.67 percent the previous week. A record low of 3.62 percent was set three weeks earlier.

But the rate on one-year adjustable-rate mortgage, or ARMs, increased to 7.18 percent from 7.07 percent a week ago, the MBA said.


The drop-off in home loan refinancing demand does not bode well for the flailing U.S. economy as this activity typically encourages an increase in consumer spending.

By lowering monthly mortgage payments, lower rates may also help some homeowners avoid default and foreclosure — if their credit is good enough.

“If home loan refinancing picks up, it would certainly be a positive for homeowners, and while I do not want to diminish its importance, its impact on the economy should be utterly modest,” he said.

The housing market has been struggling since the expiry of popular home buyer tax credits earlier this year. To take advantage of the tax credits, buyers had to sign purchase contracts by April 30. Contracts originally had to close by June 30, but that was extended by three months.

The tax credits pulled sales forward and activity dropped after the expiry.

More insight into the state of the housing market will emerge on Friday when the National Association of Realtors releases its September pending home sales data. (Editing by Jan Paschal)

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