December 3, 2008 / 4:42 PM / 9 years ago

UPDATE 1-US mortgage applications post largest gain ever

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By Julie Haviv

NEW YORK, Dec 3 (Reuters) - U.S. mortgage applications surged by the largest amount on record last week as a new Federal Reserve program pushed interest rates down to their lowest level in more than 3 years, data from an industry group showed on Wednesday.

The U.S. housing market is suffering the worst downturn since the Great Depression as a huge supply of unsold homes, tighter lending standards and record foreclosures push down home prices.

But, the latest weekly data from the Mortgage Bankers Association showed potential borrowers were lured by enticing mortgage rates, which dropped dramatically after the Federal Reserve unveiled a plan last week to buy up to $500 billion of mortgage securities backed by government-sponsored enterprises, Fannie Mae FNM.P, Freddie Mac FRE.P, and Ginnie Mae.

“This clearly was an early holiday gift from the Federal Reserve to mortgage holders and home shoppers,” said Mike Larson, a real estate and interest rate analyst at investment firm Weiss Research in Jupiter, Florida.

“But, the MBA’s data is only for submitted applications, not closed loans, so a good amount may get rejected because qualifying standards are tighter and many applicants will probably find they do not have the equity to refinance given the decline in home prices,” he said.

As long as unemployment is climbing and the economy is weakening, the impact on the home purchase market should be much more muted than the refinance market, he said.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications USMGM=ECI, which includes both purchase and refinance loans, for the week ended Nov. 28 soared a record 112.1 percent to 857.7, the highest reading since the week ended March 21 when it reached 965.9.

“Many borrowers missed an opportunity to take advantage when rates dropped sharply for a brief period when the GSEs were placed under conservatorship,” Orawin Velz, Associate Vice President of Economic Forecasting, said in a statement.

“When rates plummeted following the Fed’s announcement that it would buy GSE debt and MBS, many of those on the sidelines decided to quickly jump in and take advantage of lower rates before they began to rebound,” she said.

The Fed also said it will buy up to $100 billion of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.47 percent, down a whopping 0.52 percentage point from the previous week, the largest drop since 1990 when the MBA started conducting the weekly survey. Interest rates are at their lowest level since the week ended June 24, 2005, when they reached the same level.

Interest rates were below year-ago levels of 5.82 percent.

The MBA’s seasonally adjusted purchase index USMGPI=ECI rose 38.0 percent to 361.1, the largest rise since the week ended Feb. 24, 1995. The index, however, came in well below its year-ago level of 464.3, a drop of 22.2 percent.

Overall mortgage applications last week were 8.3 percent above their year-ago level. The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was up 29.7 percent.

WEEKLY REFINANCING ACTIVITY SURGES

Cameron Findlay, chief economist at LendingTree.com based in Charlotte, North Carolina, said they are seeing a positive uptick in refinancing volume due to the drop in interest rates.

“Consumers who were previously on the fence to refinance or purchase a home are in a position to take advantage of the decline in rates,” he said on Tuesday.

“Now it’ll be a matter of qualification as lenders evaluate each borrower individually,” he said.

The low interest rates can help many drop their monthly payments, and is especially good news for those who have adjustable- rate mortgages and are looking to lock in a secure fixed-rate mortgage, he said.

The group’s seasonally adjusted index of refinancing applications USMGR=ECI jumped 203.3 percent to 3,802.8, the largest rise on record. The index was up 37.7 percent from its year-ago level of 2,761.3.

Fixed 15-year mortgage rates averaged 5.13 percent, down from 5.78 percent the previous week. Rates on one-year ARMs decreased to 6.61 percent from 6.87 percent.

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