Applications for mortgage modifications spike with low rates

Applying for a loan

Mortgage applications rose recently, as low interest rates have spurred interest in mortgage modifications. Image from Wikimedia Commons.

Mortgage applications have risen over the past month, largely thanks to more people applying for mortgage modification. Low interest rates make modifications more attractive than purchases. However, prospective buyers are still apprehensive because home values continue to fall.

Low interest rates fuel spike in mortgage activity

Months of low interest rates have caused a spike in mortgage activity, according to Bloomberg. Mortgage applications rose by 15.5 percent during the week that ended March 4, which is the largest increase in mortgage activity since June 11 of 2010. Mortgage applications declined 6.5 percent during the same week in 2010. However, applications for mortgage modifications fueled the bulk of activity, 65.5 percent of total mortgage application volume, up from 64.9 percent the week before. The Mortgage Bankers Association reports that the purchase index rose by 12.5 percent from the week before, but the MBA does not differentiate applications for purchasing existing homes or new homes. The sale of existing homes makes up about 90 percent of all home sales.

Home values continue to plunge

Home prices have declined 31 percent since prices peaked in July 2006, and there is rampant speculation that a double dip in real estate is possible. One of the leading proponents of the idea that a double dip is pending is Robert Shiller, co-founder of the Case-Shiller Index, according to CNN. Shiller believes home prices will continue to fall, and the fact that home sales dropped during January 2011 certainly means it is possible. Unfortunately for most middle class prospective home buyers, taking advantage of lower prices is going to become more difficult over the next few years as financing standards are about to change.

Fannie and Freddie may take 30 year mortgage with them

The government has expressed interest in getting rid of Fannie Mae and Freddie Mac. Fannie and Freddie create capital for lenders by purchasing mortgages and selling them to investors, keeping the mortgage industry flush with cash for new loans. Should the mortgage houses be done away with, the 30-year fixed mortgage may go with them, according to the New York Times. A 30-year loan with fixed interest is a risky venture, as the lender cannot see the future. Few people pay off the loan or stay in the same house for 30 years. It is likely that within the next decade, adjustable rate mortgages will become the norm, as investors will want to be able to adjust interest rates to the market. Larger down payments will likely be required, and interest rates will be higher.

Sources

Bloomberg

Mortgage Bankers Association

CNN

New York Times

 

Other recent posts by bryanh