Adjustable-rate Mortgage Activity Increases


The Mortgage Bankers Association’s (MBA) latest Weekly Application shows an uptick in applications for the week ending July 17, 2020. The Market Composite Index increased by 4.1% from the previous week on a seasonally adjusted basis. Refinancing activity showed continued fervor, increasing by 5.3% from the previous week, while purchasing activity increased moderately by 1.8%. The MBA’s 30-year fixed-rate mortgage rate inched up by one basis point to 3.2% from the record low reached in the previous week. This marks the first time in over three months that the rate increased albeit by a negligible amount. The MBA believes the summer homebuying market to be robust, with many prospective homeowners returning to the market, with purchasing and refinancing showing strong year-over-year increases of 19% and 122%, respectively.

The upswing of 4% in the latest week in the activity of adjustable-rate mortgages (ARMs), i.e., mortgages whose interest rates periodically change based on a widely-tracked market rate, such as LIBOR, may reflect renewed optimism in the U.S. economy. Generally, changes in the activity of ARMs is a lesser followed indicator of economic uncertainty, compared to the Treasury-30-year fixed-rate mortgage rate spread, as covered previously. However, as the pandemic’s negative effects spread to other sectors of the U.S. economy, the dynamic between fixed-rate mortgages and adjustable-rate mortgages drastically changed compared to most of 2019. Fixed-rate mortgages have maintained lower levels of activity than ARMs, but by the start of the second quarter of 2020, the former took the lead. This dynamic is shown in the figure below.

Nevertheless, ARMs continue to take a small share of the mortgage market. By number of applications, the ARM share in the latest week was 3% and by dollar volume, it was 7.5%. It should be noted that the share of ARM activity remained at 3.0%, unchanged from the previous week, possibly due to a proportionate rise in fixed-rate mortgage activity. Refinancing’s share of total activity increased by 6 basis points to 64.8%.

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