Higher Mortgage Rates Prompt Fewer Loan Applications: Fed Survey

WASHINGTON — Fewer U.S. borrowers filed new mortgage applications or refinanced their homes as mortgage rates ticked up over the summer, according to a survey of loan officers released Monday by the Federal Reserve Board.

"On net, a moderate fraction of large banks and a modest fraction of small banks reported having experienced a lower volume of applications for home-purchase loans since the spring," the Fed said in its Senior Loan Officer Opinion Survey, which is released every three months.

Fifteen large banks — or 44.2% of those surveyed — said the number of applications by borrowers were either "moderately" or "substantially" lower. No institution reported that application volume had been "substantially" higher in that period.

The results were reflective of the fact that the national average 30-year fixed-rate mortgage had increased roughly 100 basis points between May and October, when the survey was sent to respondents by the Fed.

Similarly, consumers were also inclined to bypass opportunities to refinance their mortgages as a result of the higher rates.

The preponderance of respondents — 91.2% of large banks — said they saw a lower number of applicants in the spring before there was an increase in mortgage rates.

"The decrease in the volume of applications for mortgage refinancing was much more widespread, with more than 90% of respondents having reported that they have recently received moderately to substantially lower volumes of refinancing applications relative to the volume received in the spring," according to the Fed's survey.

Financial institutions said they had reduced the processing time for mortgage applications, but instead upped their marketing of home purchases loans to potential consumers.

Roughly 42% of large banks said they reduced the time spent between application and origination of home loans, while 38.7% said they increased the time they spent marketing to future borrowers.

As a result, banks reduced slightly the number of staff responsible for processing or originating a new home loan. Ten large banks said they reduced their staff in these areas, where the majority of firms said they made no changes to their personnel in this area.

"On net, a moderate fraction of banks reported having reduced the staff allocated for processing applications for mortgages to purchase homes," according to the Fed's survey.

Even with higher mortgage rates, banks stayed the course in adhering to the minimum FICO score they required from borrowers and minimum down payment requirements. Roughly 93.5% and 96.8% of large banks said those requirements were unchanged, respectively.

Additionally, very few banks said they were more likely to approve first-time borrowers whose loans were eligible for purchase by Fannie Mae or Freddie Mac and held a FICO score between 620 and 720 and had a down payment between 10% and 20%.

Only one large bank said it was more willing to lend to a borrower with a FICO score of 620 and a 10% down payment. Similarly, on the opposite side of the spectrum, only one large bank said it was more willing to lend to a borrower with a FICO score of 720 and a 20% down payment.

Separately, banks were asked to compare any changes they've made to applications of subprime auto loans over the past year.

"Only 10 respondents indicated that they originated such loans over the past year," according to the Fed's survey. "For each of the surveyed terms on those loans — such as loan rate spreads, minimum required down payment, and credit score — not more than 3 of these 10 banks reported having eased at least one term."