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Why Mortgage Applications Suddenly Plummeted

Posted December 16, 2008 by Kate Dickman

From high hopes to low notes

Most readers were surprised to read about the sudden drop of mortgage applications to 7.1 percent on the second week of the month after pitching 112.1 percent the previous week. The government disclosed its plans of buying $500 billion of mortgage-backed securities (MBS) and $100 billion of debt issued by Fannie Mae and Freddie Mac. That puts a lot of security among homebuyers who would likely benefit from the effects of government intervention in the property market.  Most thought that the surge was the beginning of real estate rebound but the next report released a devastating figure that ultimately dashed hopes for recovery.

So what caused the plunge? We cite some veritable reasons behind this.

Market Impulse. The federal support came in after a long-awaited response needed by the public. As for homeowners who were waiting for even lower mortgage rates by which they can get a loan or refinance satisfactorily, the news brought in a frenzy of applications. However, such impulse cannot be obviously sustained since not all homebuyers and refinancers could easily qualify for a loan. The credit market is tight and there’s no easy way in these days.

Higher Credit Risk. There has never been any other time that mortgages were very risky until today. As more people keep on channeling their finances to safer forms of investment like Treasury bills, MBS continue to loose their appeal. If consumer confidence deteriorates, so does the investors’. What buyers have learned is that by jumping into the bandwagon may not necessarily bring in changes to the macroeconomy.

Unemployment Uncertainties. Mortgage applicants were restrained by their employment security after several companies chose to follow suit by reducing working hours and slashing more employees. That puts their financial situation in jeopardy considering that most homeowners who desire for refinancing are planning to convert their adjustable rate mortgages (ARMs) to fixed-rate types. They mostly belong to the middle-income bracket and are working in recession-prone industries where the effects of the crisis are prevalent.

Judging by the trend of applications, only buyer-targeted proposals from the government are effective solutions to this mess. That includes averting sudden commotions by ensuring stronger market fundamentals.

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