Mortgage Applications Down as ARM Demand Tumbles

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Applications for U.S. home mortgages fell last week amid a modest rise in rates on fixed 30-year loans, while demand for adjustable-rate mortgages (search) (ARMs) fell to its lowest level in over a year, the Mortgage Bankers Association (search) said on Wednesday.

The MBA said purchasing and refinancing activity dropped during the holiday-shortened week ending July 8, after surging the previous week.

The MBA's seasonally adjusted index of mortgage application activity decreased 7.2 percent to 791.9, nearly erasing all of the previous week's 9.6 percent gain.

On a four-week moving average, the index is down 2.9 percent from 826.4 to 802.6.

Fixed 30-year mortgage rates averaged 5.62 percent last week, excluding fees, up 4 basis points from 5.58 percent the previous week.

The MBA on Tuesday forecast gradually increasing mortgage rates (search) through the end of 2005 even as it predicted a record year for the U.S. housing market. It said sales of both new and existing homes will hit new highs for the fifth consecutive year.

Many analysts say housing prices will stop climbing when mortgage rates hit levels that will deter buying. But for now, most believe rates are still at levels that are enticing to consumers.

Mortgage rates are still lower than a few months ago. The 30-year mortgage rate hit 6.08 percent at the end of March, according to MBA figures. A year ago, it was at 5.95 percent.

Breaking down mortgage financing by sector, the MBA said its purchase index, a gauge of loan requests for home purchases, fell 6.1 percent to 489.0, after rising 9.1 percent the previous week.

The MBA's seasonally adjusted index of refinancing applications dropped 8.4 percent to 2554.3, after climbing 10.2 percent the prior week.

Applications for adjustable-rate products experienced an even steeper decline of 15.8 percent, according to Michael Cevarr, MBA's director of member surveys.

"As a result, the ARM share of applications, at 27.9 percent, is at its lowest level since March of 2004," he said in a press release.

The ARM share of activity stood at 30.7 percent the week before. The drop was also against the backdrop of lower rates on one-year ARMs, which fell to 4.56 percent from 4.60 percent the prior week.

ARMs' low initial payments allow borrowers to buy homes that they would not necessarily afford with a fixed-rate loan.

Refinancings also decreased as a percentage of all mortgage applications, at 45.1 percent, down from 45.7 percent the previous week.

The MBA also said the average contract interest rate for 15-year fixed-rate mortgages rose 3 basis points last week, to 5.21 percent from 5.18 percent a week earlier.

In forecasts earlier this year, industry analysts and economists said they expected home sales to edge off record 2004 levels as the Federal Reserveraises interest rates.

But now, some of them have revised their predictions, pointing to the fact that demand remains robust and shows few signs of waning.

Last week, Freddie Mac (FRE) Chief Economist Frank Nothaft, in his monthly outlook, boosted his forecast for new and existing home sales to 7.21 million for 2005 from a previous target of 7.10 million. Last year, home sales hit a record 7.17 million.

In June, the National Association of Realtors' chief economist boosted his target for existing home sales to a record after earlier forecasting the start of a slowdown in 2005.

In its forecast on Tuesday, the MBA said new and existing home sales would each increase by 2 percent this year.

The MBA's survey covers approximately 50 percent of all U.S. retail residential mortgage originations. It has been conducted weekly since 1990.

Respondents include mortgage bankers, commercial banks and thrifts.