Government mortgage loan demand drops as affordability issues loom

By Real Estate News

Mortgage rates declined last week as headlines on the bank crisis slowed, which could have spurred borrowers’ demand for home loans. But that did not happen, as the affordability issues that remain on the horizon challenged mainly first-time homebuyers.  

Overall, mortgage applications declined 4.1% last week on a seasonally adjusted basis, down from one week earlier, according to the Mortgage Bankers Association (MBA). The survey, conducted weekly since 1990, covers over 75% of all U.S. retail residential mortgage applications. 

But the decline in demand for mortgage loans was more evident in the government market, which consists of Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA) and Department of Veteran Affairs (V.A.) loans. Last week, mortgage apps in the space were 8.4% down compared to the previous week. 

Meanwhile, the conventional space – not offered or secured by a government entity – registered a 2.7% decline in the same period. 

“We do expect strong demand from first-time homebuyers over the next several years given the large number of millennials hitting peak first-time homebuyer age, but affordability remains a real challenge in this environment,” Mike Fratantoni, MBA’s senior vice president and chief economist, said in a statement. 

Ultimately, the share of FHA, V.A. and USDA loan applications decreased to 23.6% last week, down from 24.4% the week prior. 

Spring misses its burst 

Refi activity remains slow, as borrowers are still locked with loans obtained at 2-3% mortgage rates during the pandemic. The Refinance Index decreased 5.4% from the previous week and 59% from the same week one year ago. Refinancing comprised 28.6% of total applications last week, down compared to 29.1% the previous week. 

In addition, purchase app volume declined 3.5% from the prior week and 35% from the same week one year ago. According to the MBA, the drop follows four weeks of increasing purchase app activity, as mortgage rates declined due to the bank crisis.

“Spring has arrived, but the housing market is missing the customary burst in listings and purchase activity that typically mark the season,” Fratantoni said. 

The MBA data shows the average contract interest rate for a conventional 30-year fixed-rate mortgage ($726,200 or less) fell five basis points from the prior week to 6.40% last week. Rates on jumbo loans (greater than $726,200) increased to 6.36% from 6.27%. 

Regarding the jumbo market, Fratantoni explained: “While we have seen relative weakness at the high-end of the housing market in recent months, the divergence in rates suggests that banks may be tightening credit in response to recent challenges, preserving balance sheet capacity as deposit balances have declined. In recent years, most jumbo loans have been kept on depository balance sheets.”