Rates Up & Mortgage Apps Down, More on How Loans Are Approved

Rates Up, Mortgage Apps Down, Stocks & Commodities Up
The Mortgage Bankers Association of America announced that applications dropped last week due to higher rates. That is about as surprising as glam-rock singer and “American Idol” runner-up Adam Lambert announcing that he’s gay (which he did). U.S. mortgage applications fell last week to the lowest level since February, with the index of applications falling about 7% the week ended June 5th. The refinancing gauge fell 12% while the purchase index gained about 1%. Mortgage banks who staffed up in recent months continue to deal with processing their current pipelines, and at the same time wondering if they will have the business to keep their staffs busy in the coming months. Look for many to lower profit margins to try to maintain market share – typical for this kind of market environment.

At least the stock market is going up, right? After being stagnant this week, it would appear that equities will be rallying today. Haven’t you heard? In spite of more housing foreclosures ahead, and commercial lending being in trouble, the economy is doing great! Commodities are going up, with oil now over $71 per barrel and gold up $10 an ounce. Yesterday’s 3-yr auction went well, which was nice to see, but we have $19 billion of 10-yr Treasury notes to sell today, with the 30-yr tomorrow. Fortunately for mortgage rates, due to the drop off in business their prices are not doing as badly.

Trade Gap Widens, Mortgage Bonds/Rates Worse
The only news out this morning was the U.S. trade gap, which widened to $29.2 billion in April as exports weakened for 8 out of the last 9 months, down 2.3 percent to $121.1 billion. Imports declined in April for a ninth straight month but by a smaller amount than exports, down 1.4 percent to $150.3 billion, mostly due to low demand on our side. After the news, and with the focus seemingly on the stock market, we find the 10-yr yield at 3.92%, and mortgage prices worse again by .250-.375.

More on How Loans Are Approved
An astute reader yesterday, after reading my comments about DTI (Debt-to-income ratio, used to approve loans) including or not including payments of less than 10 installments, pointed out that FHA (via DU) does not exclude installment payments with less than 10 payment remaining unless the payment is under $100. And while we’re talking about FHA and DTI, some investors recommend in the case of FHA where revolving debt can be paid off to qualify, it is not prudent to exclude such payments when the revolving debt is likely to reoccur. If the debt paid off is an installment debt, such as an auto loan, look at the credit report for inquiries for new auto financing and consider the entire transaction and how the paid off debt will affect the borrower’s future financial picture. Will the borrower need to take out additional financing to replace cars or student loans?

Commercial Mortgage Defaults Rising
Analysts at leading “think tanks” are increasingly pointing out that they believe the default rate (90 days or more down) on commercial mortgages will continue to go up. According to the latest report (from Real Estate Econometrics) the rate is likely to reach 4.1% by the end of this year. They point out that not only is there a decline in real economic activity, putting pressure on retail income and profits – therefore rents, but also lending to commercial properties has decreased with the credit market issues. If this default rate is hit, it would imply defaults on about $44 billion of commercial mortgages, given that about $1 trillion of such loans held by U.S. banks in the first quarter. The default rate may match where rates were in 1993 and 1994.

Daily Humor
A little girl asked her mother: “How did the human race begin?”
The mother answered, “God made Adam and Eve; they had children; and so was all mankind made.”
Two days later the girl asked her father the same question. The father answered, “Many years ago there were monkeys from which the human race evolved.”
The confused girl returned to her mother and said, “Mom, how is it possible that you told me the human race was created by God, and Dad said they developed from monkeys?”
The mother answered, “Well, Dear, it’s very simple. I told you about my side of the family, and your father told you about his.”