Drop in loan rates sparks a surge

U.S. mortgage applications jumped by nearly 50% last week as home loan rates fell after the Federal Reserve cut interest rates and took steps to restore bond-market confidence, an industry trade group said Wednesday.

An 82% surge in refinancing applications overshadowed a 10.6% rise in home-purchase loan requests, lifting total applications from the previous week, when home-loan demand sank to its lowest since late December.

The Mortgage Bankers Assn.’s overall mortgage applications index jumped 48.1% to a seasonally adjusted 965.9 in the week ended March 21, its highest since early February.

“The Federal Reserve acted last week to bring some stability to the mortgage-backed securities market, and we saw an immediate impact with a drop in mortgage rates,” Jay Brinkmann, the MBA’s vice president of research and economics, said in a statement.

The Fed last week slashed official lending rates by three-quarters of a percentage point, to 2.25% for the federal funds rate, its lowest in more than two years.

Average 30-year home loan rates fell to 5.74% from 5.98% the previous week, the lowest since 5.72% in early February, according to the trade group.

The two-week drop of 0.63 of a percentage point was the biggest in more than four years, based on Reuters EcoWin data.

In response, homeowners raced to refinance their mortgages, putting in more applications than in any week since the beginning of 2001, when the Fed cut rates between policy meetings.

Payments on more than half a trillion dollars in adjustable-rate mortgages are scheduled to reset this year, according to analysts. Homeowners who still have equity in their houses despite falling prices are pouncing on such opportunities to refinance into fixed-rate mortgages.

“The rise in applications was entirely for fixed-rate mortgages, which jumped 55%,” said Michelle Meyer, an economist at Lehman Brothers.

“In contrast, applications for adjustable-rate mortgages fell 93% to the lowest since 1990,” she said.

Easing up on monetary policy is one of many government tools being used to shore up shaken markets, which froze bond markets and stunted the willingness of many lenders to extend credit.

Lending practices remain more rigid, and home prices keep falling. Many borrowers who can still qualify for home loans are waiting for even more cheapening, some analysts said.

The Fed also this month said that it would accept a broader range of collateral, including some bonds backed by mortgages not guaranteed by Fannie Mae and Freddie Mac, in a new securities lending program aimed at boosting market liquidity. Last week, the Fed further expanded the types of mortgage bonds included in this program.

On a four-week moving average, which adjusts for volatility, total mortgage applications rose 11.3% while the purchase index gained 3.1% and the refinancing index climbed 18.3%.

In another sign of a possible stabilization in housing, the government on Wednesday reported a smaller-than-expected drop in sales of new homes for February.

This week, the National Assn. of Realtors said that existing-house sales rose for the first time since July.