by Calculated Risk on 5/09/2007 11:44:00 AM

The Mortgage Bankers Association (MBA) reports: Mortgage Applications Increase in Latest MBA Survey

The Market Composite Index, a measure of mortgage loan application volume, was 680.7, an increase of 3.6 percent on a seasonally adjusted basis from 657.2 one week earlier. On an unadjusted basis, the Index increased 4 percent compared with the previous week and was up 19.9 percent compared with the same week one year earlier.

The Refinance Index increased 4.9 percent to 2115.2 from 2015.8 the previous week and the seasonally adjusted Purchase Index increased 2.6 percent to 438.3 from 427.3 one week earlier.

Click on graph for larger image.

This graph shows the Purchase Index and the 4 and 12 week moving averages since January 2002. The four week moving average is up to 418.3 from 412.2 for the Purchase Index.

Industry insiders are declaring the Spring Selling Season a "bust", yet the seasonally adjusted MBA purchase index is rising. What gives?

Fannie Mae's chief economist David Berson asks the same question this week: If purchase applications are stable, why are home sales so soft?

Why has the relationship between purchase applications and home sales weakened recently? One likely explanation is that the stricter guidance of depository institution regulators over the past year with respect to mortgage loans has made it more difficult for some households to qualify for a loan. As a result, those households have had to make multiple applications in order to get a mortgage loan -- thereby pushing up purchase applications without increasing home sales.

Just look at this recent Ad from Countrywide.

It's hard to imagine rejecting only 20% of applications is a selling point - but apparently Countrywide considers this a low rate.

This probably means other lenders have an even higher rejection rate, and Berson suspects the frequency of multiple applications has increased recently, leading to the MBA Index being less useful.

Another reason for the breakdown in correlation between applications and sales is how the MBA survey is conducted. According to the MBA:

The survey covers approximately 50 percent of all U.S. retail residential mortgage originations, and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts.

Since many smaller lenders have closed shop (see the Implode-O-Meter), more potential buyers may be applying for loans from the lenders covered by the MBA survey. As an example, suppose 1000 people applied for loans in a given week from 10 lenders.

Lender 1: 250
Lender 2: 150
Lender 3: 100
Lender 4-10: remaining 500 applications.

The MBA survey covers "approximately 50 percent of all U.S. retail residential mortgage originations", so in this example the MBA would only need to survey the top 3 lenders. Now if lender 10 closed shop (with 50 applicants), and the applicants all applied in equal proportions to the other lenders, the MBA index would increase 5% without any increase in overall activity.

My suspicion is this is what has happened lately, in addition to Berson's suggestion of more multiple applications. During this period of transition and instability, the MBA Index appears useless.