Mortgage applications to refinance did eke out a 0.3 percent gain from the previous week to their highest level since October, but they are still down 31.5 percent from a year ago, when rates were even lower.
Refinance volume had been gaining at a faster clip, as rates fell over the last several weeks, but the pool of eligible borrowers who would benefit from a refi is small and shrinking; millions of borrowers have already been through the process.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 3.97 percent, from 4.02 percent, with points increasing to 0.41 from 0.40 (including the origination fee) for 80 percent loan-to-value ratio loans. This is the fourth-straight weekly decrease for this rate, and it continued lower Tuesday after a major binge in the bond market. Bond yields fell sharply, and mortgage rates loosely follow the yield on the 10-year Treasury.
"Mortgage rates fell below 4 percent in our survey for the first time since October 2015. The jumbo rate also decreased and was at its lowest level since April 2015," said Michael Fratantoni, chief economist for the MBA. "Despite the fall in rates, mortgage application activity was likely muted by the major East Coast snowstorm, although refinance activity increased very slightly."
Mortgage applications to purchase a home fell 7 percent from one week earlier but are 17 percent higher than the same week one year ago. Lower rates may not be pushing volume so much, but they are changing the types of loans borrowers want.
"In the winter we did see a lot of interest from borrowers on the ARM (adjustable rate mortgage) side, but now we're seeing it back to the 30-year fixed," said Chris Hart, CEO of First California, an independent, nonbank mortgage lender. "They want to borrow money for longer than they need it."
The ARM share of applications fell to 5.9 percent from 6.9 percent the previous week. ARMs offer a lower interest rate to start but at a higher risk, as they can adjust higher over time if interest rates rise. With rates falling again, borrowers may feel they don't need to take the extra risk.
Hart said he is seeing more borrowers shopping online, rather than calling directly to lenders. He is also seeing brokers submit loans through his wholesale business without locking in the rate.
"They believe that rates will go lower. I do think there is an underlying trend where people want to pick the bottom," he said.