Mortgage Applications Fall as Rates Rise

Mortgage applications fall as home loan interest rates edge higher.

Author:: Miriam Reimer
Publish date:: Nov 3, 2010 3:03 PM EDT

(Updated with commentary on impact of QE2.)

WASHINGTON (

) -- Mortgage applications fell last week as

edged higher.

The volume of mortgage loan applications decreased 5% on a seasonally adjusted basis in the week ending Oct. 29, the Mortgage Bankers Association said early Wednesday.

Refinancing applications decreased 6.4% from the previous week, the third consecutive week of declines by that measure. New-home purchase loan applications increased 1.4% week-over-week.

A total of 81.3% of all loan applications last week were for refinancing existing mortgages, slightly lower than the 82.3% share observed in the prior week.

One reason for the waning mortgage activity last week was higher mortgage rates. The average rate on a 30-year fixed mortgage increased to 4.28% from 4.25% in the prior week.

"If the Fed announced a big enough quantitative easing, this would drive down mortgage yields to new lows and set off a new wave of refinancing," Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ told

Bloomberg

. "The housing market is still stuck in the doldrums."

The

Federal Open Market Committee, the policy-setting arm of the Federal Reserve, said Wednesday it will buy $600 billion of longer-term Treasury securities by the end of the second quarter 2011 at a pace of about $75 billion per month to lower long-term interest rates and help support the economy.

The

second round of quantitative easing, dubbed QE2, largely met expectations for both its timing and scope although market strategists differ in their opinions of how effective the measure will be at bolstering the flagging recovery.

Critics assert that further stimulus could create dangerous asset inflation. The Fed's hope is that a temporary lowering of long-term interest rates will drive investors to riskier assets, stimulating investment and spending.

Just as the subprime mortgage troubles expanded into a total housing market downfall, the latest scandal in the home loan industry has expanded into a nationwide political firing line aimed -- once again -- toward the banks due to

problems with foreclosure filings

, dubbed "robo-signing."

Foreclosure moratoria at several big-name banks like

JPMorgan Chase

(JPM) - Get Report

are likely to cause further delays in the housing market recovery.

Record-low and near-record-low mortgage rates failed to spark robust demand for housing in recent months, but continue to have an effect on homeowners looking to lower their monthly payments through refinancing.

While any mortgage demand is a good sign, the still-struggling housing market continues to be plagued by sluggish demand, in part because of the tight credit market and inability of many potential buyers to access the credit they need to finance a mortgage.

Many Americans suffer from negative equity, where the amount they owe on their home is higher than the value of it, making them unqualified for refinancing.

Still, all is not lost for the housing market.

Late last month the

Commerce Department reported that sales of newly built homes rose a better-than-expected 6.6% in September. The rise was well ahead of expectations though the new-home sales pace remained 21.5% lower than year-earlier levels.

>> New-Home Sales Rise 6.6% in September

The government data followed an earlier reported from the

National Association of Realtors which showed that sales of previously occupied homes rebounded 10% in September. The existing-home sales data also came in far better than expected, though the month's rate was the third worst on record.

>> Existing-Home Sales Rise 10%

The housing market has been under tremendous pressure for some time, and demand fell further after the

springtime expiration of federal tax credits for homebuyers

that offered credits up to $8,000 for first-time buyers and $6,500 for those buying new primary residences.

>>4 Top Homebuilder Stocks: Life After the Tax Credit

Stocks in the homebuilder sector were mostly lower Wednesday. The

SPDR S&P Homebuilders

(XHB) - Get Report

and

iShares Dow Jones US Home Construction

(ITB) - Get Report

, exchange-traded funds that tracks the homebuilder sector, were down 0.8% and 1.5%, respectively, in afternoon trading. The major indexes were mixed, with the

SPDR S&P 500

(SPY) - Get Report

lower by 0.3%. The

SPDR Dow Jones Industrial Average

(DIA) - Get Report

was flat and the

PowerShares QQQ Trust

(QQQQ)

up 0.2%.

Among specific builders,

PulteGroup

(PHM) - Get Report