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Economy in Brief

Mortgage Applications Edge Lower; Credit Spreads Evince High Risk
by Carol Stone August 20, 2008

Mortgage applications fell 1.5% in the week ended August 15, following a like decline the week before, together basically erasing a 2.8% increase in the August 1 week. This "Market Composite Index" stood at 419.3 in the latest week, where the number of applications on March 16, 1990 is set equal to 100; this is down 34.6% from a year ago. Applications for loans to purchase houses edged down 0.4% in the week and are off 8.4% from July's weekly average and 28.9% from the year earlier; those to refinance old loans decreased 3.7% to 1034.5, down 22.2% from July and 42.7% below a year ago.

These data from the Mortgage Bankers Association are included in Haver's SURVEYW database. Other analytical information in this application survey tells that refinancing presently constitutes only 34.8% of the number of applications and 32.4% of their dollar value.

The mortgage interest rate situation is also notable. With the turmoil among Fannie Mae, Freddie Mac and originating lenders and rising delinquencies by borrowers, credit spreads remain wide throughout financial markets, keeping interest rates elevated on all but short-term, highly liquid debt. The most dramatic illustration in these MBA data comes from the 1-year ARM rate versus the 1-year Treasury. The ARM rate itself was 7.07% last week, higher than the fixed rate on 30-year mortgages, 6.47%. The spread on the ARM over the 1-year constant maturity Treasury was 4.89%; the spread of the 30-year mortgage over the 10-year Treasury was 2.56%. For the vast majority of the history of these MBA mortgage rate series (since 1990), the spread was larger for the longer-term rates, as one might intuit. But since last August, this relationship, along with many other risk measures, has been turned on its head, and sharply so. There is today far more perceived risk in short-term mortgage instruments than long-term.

MBA Mortgage Applications (3/16/90=100) 08/15/08 08/08/08 Y/Y 2007 2006 2005
Total Market Index 419.3 425.9 -34.6% 652.6 584.2 708.6
  Purchase 314.0 315.2 -28.9% 424.9 406.9 470.9
  Refinancing 1,034.5 1,074.6 -42.7% 1,997.9 1,634.0 2,092.3
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