New mortgage and refinancing applications, starting in May, fell last year, and this continued at least through the third week of December.


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Final figures are not in yet but, according to the Mortgage Bankers Association (MBA), new home loan applications plummeted by 18 percent in November alone from the prior month, and the overall trend is down since November 2008. While home sales overall are up, some are concerned the downtrend in new loans will be bad for the economy and that rising mortgage interest rates will discourage buyers.

The concerns over the drop in new applications has some economists and bankers less concerned about the housing market outlook, but more concerned with the health of the banking sector. In September, Wells Fargo announced it expected to write 30 percent fewer mortgages and scheduled a round of 2300 layoffs in its mortgage-related units. Bank of America® followed in October by stating it would begin layoffs of around 4,000 mortgage-related employees. Citigroup announced cutbacks of 1,200 workers in mortgage divisions areas as well.

Other mortgage concerns

Additional concerns come as mortgage rates creep up amid worries about the Federal Reserve Bank’s decision to pull back on its stimulus program early this year. However, officials from the central bank have noted a desire to keep short-term interest rates low, even after unemployment rates drop below 6.5 percent, or while inflation remains below 2 percent. Still, a bond market sell-off followed the Fed’s decision, which pushed interest rates up again and suggests investors are hesitant about the loan market.

In a statement in late December, Mike Frantantoni, MBA’s vice president of research and economics, said, “Following the Federal Reserve’s taper announcement, mortgage application volume dropped again last week, with rates increasing and refinance application volume falling to its lowest level since November 2008.”

A top forecaster says the concern is over-hyped, or at least will not hurt the sales of new homes. Brian Jones at Société Générale said, “The rate induced swoon in mortgage applications is overblown.” He said 95 percent of the downturn in new applications comes not from new applications for homes, but from new applications to refinance an existing loan. This explains why new home sales continue to rise as new loan applications fall.

Another reason to keep panic about the housing market at bay, according to Jones, is that the MBA data is incomplete and doesn’t include applications made through wholesale brokers or certain other methods.

Jones says the housing sector has another ace up its sleeve: many more homes are being purchased with cash than in the past, and the mortgage figures don’t account for those home sales.

However, some of those cash sales may represent prior woes for banks in addition to lost revenue on future loans. Most foreclosure properties require immediate payment in full by buyers, and fewer financing options are available for such properties. A glut of foreclosed properties in some markets may be a strong factor driving the number of all-cash property sales.

While Jones is optimistic for the housing market, banks may continue to falter if the slumping trend in new loan application continues. Large scale layoffs can negatively impact the economy, especially if employees trained strictly in mortgage-related fields have difficulty finding work or have trouble transitioning into new fields.

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