A Nightmarish Development In Real Estate Finance

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Includes: IYR
by: Markos Kaminis

In a nightmarish development in real estate finance, mortgage activity has fallen off a cliff over the last two weeks due to an uptick in mortgage rates. Reported this morning, this week's decline of 9.8% compounded upon last week's drop of 7.3%. The issue illustrates how dependent the real estate market junkie is upon his Fed fix, so it will be even more interesting to see what Chairman Bernanke has to say today in his testimony to Congress.

The most recent mortgage activity data arrived from the Mortgage Bankers Association Wednesday before the market open. This week's report covering the period ending May 17 showed the Market Composite Index fell 9.8%, compounding upon the prior week's 7.3% decline. Applications tied to the purchases of homes decreased by 3.0% on a seasonally adjusted basis, adding on to the 4.0% decline of the week before. The Refinance Index fell by 12% last week, the largest single weekly decline in refinance applications this year. What is worse is that the collapse followed the prior week's 8.0% dive.

It's all because of a sudden uptick in mortgage rates, which increased to their highest level since March last week. Effective mortgage rates rose across all loan balances and types.

Loan Type

Rate Increase

Effective Rate Change

30-Yr. Fixed on Conforming Balance

+11 Basis Points

Increased

30-Yr. Fixed on Jumbo Balance

+6 Basis Points

Increased

30-Yr. Fixed FHA Sponsored

+10 Basis Points

Increased

15-Yr. Fixed Rate Mortgages

+8 Basis Points

Increased

5/1 ARMS

+5 Basis Points

Increased

Click to enlarge

The increases in effective mortgage rates of the last two weeks have effectively frozen the mortgage market. It illustrates the sensitivity of activity to rates today. Now, this issue could be temporary, and be the result of prospective actors simply putting off activity in the hope or expectation of a future rate retracement. Or, if this goes on, it could also illustrate the deep dependence of the real estate market on synthetically lowered rates, thanks to the Federal Reserve. If so, this latest uptick and reaction is nightmarish for the real estate market, including its major financiers, because it would illustrate a lack of real underlying economic strength beyond low rates.

Mortgage Financiers

Wednesday's Morning

Bank of America (NYSE:BAC)

+1.1%

Citigroup (NYSE:C)

+1.5%

J.P. Morgan Chase (NYSE:JPM)

+2.7%

Wells Fargo (NYSE:WFC)

+0.4%

U.S. Bancorp (NYSE:USB)

+0.8%

Click to enlarge

On Wednesday, the shares of the major mortgage lenders are also being influenced by reported moderate growth in Existing Home Sales for April and the Federal Reserve Chairman's testimony to the Joint Economic Committee of Congress. I expect that if not for the testimony, investors in these shares would be paying more attention to the real nightmarish change in mortgage activity depicted again this week. Thus, I expect that after the testimony is concluded and depending on if this nightmare recurs, these shares would likely reconsider nascent gains. More importantly, if this issue persists and truly reflects a lack of real health in the economy beyond the support of the Fed, then the real estate recovery could stall.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.