The Psychology Behind the Recovery

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Th e M Rep o RT | 39 O r i g i nat i O n s e r v i c i n g a na ly t i c s s e c O n da r y m a r k e t ORIGINATION the latest ORIGINATION resurgence in arms Projected for 2014 As fixed rates rise, borrowers will see more appeal in adjustable-rate products, Freddie Mac says. i n the growing arena of adjustable-rate mortgages (ARMs), hybrid products continue to attract the most interest, Freddie Mac revealed in its 30th Annual ARM Survey. As fixed interest rates continue on their upward path, ARM initial-period rates remain near historic lows—a stat the GSE an- ticipates will factor into borrow- ing decisions in the year ahead. "Homebuyers have preferred fixed-rate mortgages the past few years because of the low interest rates and the certainty of the monthly principal and interest payment," said Frank Nothaft, VP and chief economist for Freddie Mac. "As longer-term interest rates rise, ARMs with their lower initial interest rates will become more appealing to loan applicants. "We are expecting ARMs to gradually gain back some favor with mortgage borrowers, with the ARM share rising to 12 percent of the home-purchase market in 2014," he added. ARMs accounted for about 10 percent of new home pur- chase loans in 2013, according to data from the Federal Housing Finance Agency. Over the last year, the com- pany's data shows initial-period rate changes on hybrid ARMs have been influenced largely by the length of their initial fixed- rate periods, with the longer pe- riods seeing the biggest increases. According to Freddie Mac, the pattern "largely reflects term structure movements in the rest of the capital markets and the Federal Reserve's monetary policy," which has served to keep short-term interest rates low while allowing longer-term rates to lift. Among all ARM products, hybrid offerings continue to en- joy the greatest popularity from both lenders and borrowers. The 5/1 hybrid—which features a five-year fixed-rate initial period before the rate resets annually— was the most common over the last year, followed by the 3/1, 7/1, and 10/1. Less common, the GSE says, were ARMs in which the re- pricing frequency was fixed for the life of the loan—such as the 3/3 ARM, which adjusts once every three years. mortgage app numbers Up slightly in January With so many factors in the air, future trends are hazy. J anuary loan application volumes rebounded slightly after December's steep drop, but overall numbers remain low, Capital Economics said in a recent U.S. Housing Data Response. Using weekly stats pub- lished by the Mortgage Bankers Association (MBA), Capital Economics calculated a 2.5 percent increase in applications in January, turning the trend around from an 18.2 percent decline in December and a 1.3 percent drop in November. Looking at refinancing numbers, Capital Economics observed a 1.1 percent improvement to follow December's 23.7 percent decline. Still, with monthly losses vastly outpacing gains in the last year, refinance applications remain 64.5 percent down from a year ago. "The remortgaging boom of 2012–13 is well and truly over, and we do not see a significant rally in remortgaging activity on the horizon," said Paul Diggle, property economist for the firm. With the refinance boom in the rearview, Capital Economics shifted its focus to purchase ap- plications, which rose 3.1 percent in January—consistent with a slight decline over the month in 30-year fixed mortgage rates. Still, purchase application vol- umes remain lower than they were at this point last year, and with the Federal Reserve's latest Senior Loan Officer Survey indicating a drought in purchase demand, further de- clines may be on the horizon. On the other hand, expected improvements in labor, increas- ing confidence in the housing recovery, and looser credit condi- tions may act as counterweights against recent downward trends, Capital Economic says. "On balance, we think that the positives will outweigh the negatives, allowing applications for home purchase to increase mod- estly. But this outcome is far from certain, and we wouldn't be too surprised to see mortgage applica- tions flat-line this year," Diggle said. "One thing is for certain—if mortgage demand does not recover, with investors retreating from the market, overall housing demand will start to wane." 2.5% Capital economics calculated a 2.5 percent increase in applications in January, turning the trend around from an 18.2 percent decline in December and a 1.3 percent drop in November. Source: Mortgage Bankers Association, Capital Economics

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