Mortgage app decline alarms analysts

Per HW:

The slowdown in mortgage purchase applications is weighing on analysts. Mortgage purchase apps have faltered, and that limits upside risk for mortgage rates, according to the analyst team lead by Chris Flanagan at Bank of America/Merrill Lynch.

This last week’s sharp drop in the Mortgage Bankers Association purchase index was reminiscent of the early 2014 drop. Remarkably, purchase application volume is at the same level of early 2014, even though mortgage rates are more than 50 basis points lower.

“Recent bear steepening of rates should give way to flattening, driven by front-end weakness due to looming Fed rate hike. The agency basis still has more tightening potential, as supply and prepay risk subside,” Flanagan wrote in a client note.

“We continue to like down in credit, lower dollar priced non-agency RMBS. We think the reduced risk layering in CRT is often overlooked. We revisit our risk score which captures risk layering,” they write.

Housing wire