Mortgage Activity Picks Up for Third Time in 17 Weeks

The Mortgage Bankers Association reported today that applications for home loans notched a rare increase last week. The industry group's market composite index improved by 1.3% compared to the previous seven-day period. This marks only the third time in 17 weeks the index has gone higher. At the present level, it's off its May high by 52%.

There's little question higher mortgage rates are to blame for the overall downward trend. Since the first week of May, the average rate on a conforming 30-year fixed-rate mortgage has skyrocketed, going from 3.35% all the way up to 4.51% today. The magnitude and speed of the advance have been unprecedented.

Applications to refinance existing mortgages have been the hardest hit by the hike in rates. While they improved last week by an estimated 2%, they're nevertheless down over the last four months by 62%. And over the same time period, they've gone from a 76% share of overall mortgage application activity down to 61%.

Meanwhile, applications to purchase a home haven't been hit as hard. The MBA's purchase index decreased last week by 0.4%, but it's still up by 3.8% on a year-over-year basis.

The impact of higher rates and lower mortgage volumes has been mixed. On one hand, many peripheral companies continue to do just fine. When Home Depot (NYSE: HD  ) and Lowe's (NYSE: LOW  ) , the nation's largest home improvement retailers, reported earnings two weeks ago, both companies revealed dramatic upticks in business.

For its part, Home Depot's same-store sales were 10.7% higher. And Lowe's wasn't far behind, notching comparable sales of 9.6% on a year-over-year basis.

In addition, the CEOs of both companies spoke positively, though guardedly so, about the direction of the housing market. According to Lowe's Robert Niblock, "The rate increases will likely take some sting out of the recent housing market rebound, but shouldn't derail it as long as job gains persist, homes continue to appreciate and rates rise more gradually going forward."

On the other side of the equation, alternatively, are the mortgage underwriters themselves. Wells Fargo (NYSE: WFC  ) is paramount among these, with an estimated 30% of the domestic mortgage market. The banking giant has now recorded seven consecutive periods in which it originated more than $100 billion in home loans, a historically unprecedented accomplishment.

But in response to the recent increase in rates, and the concomitant impact on the demand for refinancing activity, the bank said it will cut 2,300 positions from its mortgage department.

On top of this, while higher rates are good for most financial companies' income statements, as they expand the spread between short and long-term interest rates and thus juice net interest income, they've nevertheless wreaked havoc on balance sheets across the industry.

Mortgage REITs have felt the brunt of this assault. Annaly Capital Management (NYSE: NLY  ) watched its book value per share plummet by 14% between the first and second quarters of the year. American Capital Agency's (NASDAQ: AGNC  ) was off by 12%. Not surprisingly, shares of both companies have responded in kind, falling by 15% and 13%, respectively, over the last three months alone.

Will this trend continue, or will it reverse itself? The answer to that question will largely dictate the near- to mid-term performances of the nation's largest financial companies.

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