For Sale By Owner Homes / Mortgage Blog

US mortgage applications dip in week, subprime eyed
Wed Mar 28, 2007 11:02 AM ET



(Adds economists' quotes, changes headline, adds byline)

By Lynn Adler

NEW YORK, March 28 (Reuters) - U.S. mortgage applications declined last week as refinancing dipped, while purchase activity barely budged, an industry group said on Wednesday.

Mortgage application levels are being scrutinized as the subprime mortgage crisis causes lenders to clamp down on loans to borrowers with weak credit.

There is growing concern that fallout from tighter lending practices will hurt consumers, home builders, lenders and the broader economy.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications dipped 0.2 percent to 671.0 in the week ended March 23.

The association's seasonally adjusted purchase index edged up 0.1 percent to 411.1 while refinancing applications index slipped 0.5 percent to 2,197.7.

The week's loan levels "certainly don't show new mortgage demand lurching down; they suggest it seems to have stabilized in the short term," said Richard Iley, economist at BNP Paribas.

"But it remains a moot point," he said. "... The tightening of mortgage standards now under way because of the subprime crisis is almost certainly going to crimp demand at the margins."

All three of the association's application measures were higher in terms of a four-week moving average, which smooths out volatility.

The market index was up 1.7 percent to 676.3, the purchase index rose 0.6 percent to 410.3 and the refinancing index gained 2.9 percent to 2,238.2, according to the group. The market index stood at about 572 in the same week a year ago.

PICTURE CLOUDED BY SUBPRIME

The substantial housing market correction has been the main factor behind slowing economic growth that began last spring, Federal Reserve Chairman Ben Bernanke told the congressional Joint Economic Committee on Wednesday.

"The near-term prospects for the housing market remain uncertain," he said, adding that subprime mortgage developments had raised added questions about the housing sector.

This week, a major builder blamed a huge profit slump partly on turmoil in the subprime sector, which caters to home loan borrowers with spotty credit histories.

Lennar Corp. , the No. 3 U.S. home builder, on Tuesday said its 73.4 percent profit slide in the quarter ended Feb. 28 was due to widening subprime problems weakening an already soft housing market.

Sales of new homes fell 3.9 percent in February to the lowest in almost seven years, the Commerce Department reported on Monday. The supply of these houses lingering unsold in the market rose to its highest since January 1991.

Sales of existing homes rose 3.9 percent in February, the biggest gain since March 2004, the National Association of Realtors said last week. Home resales represent 85 percent of the U.S. housing market.

The mortgage bankers group forecast declines in sales to subprime borrowers of as much as 250,000 units a year over the next two years, and said that will slow the recovery in housing.

Home prices slid in January, staging the first year-over-year drop in more than a decade, according to the Standard & Poor's/Case-Shiller index released on Tuesday.

Some industry experts say lower home prices and low long-term mortgage rates could be compelling to buyers.

"I don't think that the subprime woes will infect the broader mortgage market or the overall economy," said Greg McBride, senior financial analyst at Bankrate Inc. in North Palm Beach, Florida.

"This is a buyer's market now," he said. "You add to that the attractive mortgage rates, and anybody that can document their income, has decent credit and a respectable debt ratio has some notable buying power."

Average 30-year fixed-rate mortgages, excluding fees, dropped 0.02 percentage point from the prior week to 6.04 percent, well below the 6.35 percent registered in the same week a year earlier, the Mortgage Bankers Association said.