Mortgage Applications Fall, Signaling Bernanke's Housing Effort Is Stalled

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Mortgage Applications Fall as Interest Rates Jump (Update1)
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By Shobhana Chandra

June 10 (Bloomberg) -- U.S. mortgage applications fell last week to the lowest level since February as a jump in borrowing costs discouraged refinancing and signaled that Federal Reserve Chairman Ben S. Bernanke’s efforts to cap rates is stalling.

The Mortgage Bankers Association’s index of applications to purchase a home or refinance dropped 7.2 percent to 611 in the week ended June 5, from 658.7 the prior week. The refinancing gauge fell 12 percent. The purchase index gained 1.1 percent.

Fixed U.S. mortgage rates jumped to the highest level this year last week, threatening to deepen the housing slump and sideline prospective home buyers. An improving economic outlook spurred an increase in rates even as a rising jobless rate is contributing record home foreclosures. Still, lower property values are helping the housing market stabilize.

“We still have a long way to go before conditions are good,” said Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania. “We need to get this market back up and running more normally.”

Government bond yields, consumer rates and price swings are increasing as the Fed fails to say if it will extend the $1.75 trillion policy of buying Treasuries and mortgage bonds through so-called quantitative easing, traders say.

Rising Yields

The yield on the benchmark 10-year Treasury note rose to 3.90 percent last week as volatility in government bonds hit a six-month high, according to Merrill Lynch & Co.’s MOVE Index of options prices. Thirty-year fixed-rate mortgages jumped to 5.45 percent from as low as 4.85 percent in April, according to Bankrate.com in North Palm Beach, Florida. Costs for homebuyers are now higher than in December.

The mortgage bankers’ refinancing gauge issued today fell to 2,605.7, the lowest level since November, from 2,953.6 the previous week, today’s report showed. The purchase index rose to 270.7 last week from 267.7.

The share of applicants seeking to refinance loans fell to 59.4 percent of total applications last week from 62.4 percent.

The average rate on a 30-year fixed-rate loan surged to 5.57 percent, the highest since November, from 5.25 percent the prior week.

Borrowing Costs

At the current 30-year rate, monthly borrowing costs for each $100,000 of a loan would be $572, or about $44 less than the same week a year earlier, when the rate was 6.25 percent.

The average rate on a 15-year fixed mortgage rose to 5.10 percent from 4.80 percent the prior week. The rate on a one-year adjustable mortgage increased to 6.75 percent last week from 6.61 percent.

The Washington-based Mortgage Bankers Association’s loan survey, compiled every week, covers about half of all U.S. retail residential mortgage originations.

Construction companies continue to struggle. Toll Brothers Inc., the largest luxury homebuilder, and Hovnanian Enterprises Inc., New Jersey’s biggest builder, this month reported quarterly losses that exceeded analysts’ estimates. Revenue dropped at both businesses.

Among reports indicating an improvement in housing, figures from the National Association of Realtors showed the number of Americans signing contracts to buy previously owned homes climbed 6.7 percent in April, more than forecast and the fourth increase in five months, as lower prices attracted buyers.

The rise in borrowing costs in the face of record low interest rates, Fed purchases and a contracting economy is the opposite of the challenge Bernanke’s predecessor, Alan Greenspan, confronted when he led the Fed.

In February 2005, Greenspan said in the text of his testimony to the Senate Banking Committee that a decline in long-term bond yields after six rate increases was a “conundrum.” At the time, he was trying to keep the economy from overheating and sparking inflation. Now, Bernanke may be facing his own.

To contact the reporter on this story: Shobhana Chandra in Washington at Schandra1@bloomberg.net
Last Updated: June 10, 2009 08:02 EDT