Weekly mortgage applications: Why you should pay attention (Part 4)

 

The MBA Refinance Index fell for the seventh straight week

The Refinance Index fell to 3.8% (to 2,247 from 2,336) even though the average 30-year fixed-rate mortgage was flat at 4.35%. The ten-year bond yield rose 8 basis points. The bond market has been re-adjusting to the idea that we may see the end of quantitative easing in fall. That said, it seems to have stabilized at these levels, at least for the moment.

(Read more: Radar Logic futures curve predicts flat real estate prices until September 2014)

MBA reported that the share of refinance applications dropped to 63%. Most originators are anticipating a more purchase-driven market going forward and believe we’ve seen the lows in interest rates. If we have in fact seen the lows in interest rates, home price appreciation will drive refinance activity more as previously underwater homeowners eventually get back to positive equity and take advantage of lower rates. Slowing refinance activity could be a negative for originators like PennyMac (PMT) and Redwood Trust (RWT).

(Read more: Bonds and REITs collapse on FOMC statement)

Implications for mortgage REITs

Refinancing activity affects prepayment speeds, which is a critical driver of mortgage REIT returns. Prepayment speeds occur because homeowners are allowed to pay off their mortgage early, without penalty, and when interest rates fall, those who can refinance at a lower rate do. This is good for homeowners. However, it isn’t necessarily good for mortgage lenders—especially REITs. When homeowners prepay, the investor loses a high-yielding asset and is forced to re-invest the proceeds in a lower-rate investment. This means lower returns going forward. A rise in prepayment speeds could negatively affect REITs, like American Agency Capital Corp. (AGNC), Annaly Capital Management, Inc. (NLY), Hatteras Financial Corp. (HTS), CYS Investments, Inc. (CYS), and Capstead Mortgage Corporation (CMO). That said, the increase in rates has basically put prepayment worries on the back burner for the REITs.

However, as rates increase, prepayments become less of a problem for REITs. But increasing rates bring their own set of problems, and REITs face mark-to-market hits on their portfolio and must adjust their hedges to a more volatile interest rate environment. Mortgage-backed securities outperform in stable interest rate environments, but they’re highly vulnerable to interest rate shocks.

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Weekly mortgage applications: Why you should pay attention (Part 1)

Every week, the Mortgage Bankers Association (MBA) puts out an index of mortgage application activity

Mortgage applications are relevant to a number of industries—from banks to non-banks, to mortgage REITs to homebuilders. This series will break down the different indices and help you learn what insight you can glean from them. If you’re a bank, you’re looking at these indices and trying to determine whether you’re competitive in all the segments you want to be competitive in. If you’re a non-bank, you might be looking to see if you’re gaining share or losing share. If you’re a mortgage REIT, you’re focusing on the refinance index and what it might mean for prepayments going forward. And if you’re a homebuilder, you’re watching the purchase index as a way to gauge future demand.

(Read more: Radar Logic futures curve predicts flat real estate prices until September 2014)

This series will look at the three main MBA indices.

We’ll start with the basic MBA Mortgage Applications Index.

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5 Financial Numbers You Should Know

iStockphoto

Financial literacy is an important, lifelong personal finance skill that everyone should have because it fosters careful spending and informed decision making. Responsible personal finance habits will guide you toward a life of financial freedom, and increasing your vocabulary of money words can only help. Here are five money definitions you should add to your financial literacy repertoire so you know how to get the most out of your money and financial decisions.

[More from Manilla.com: 5 Tips for Boosting Your Stock Portfolio]

1. Credit Score

Your credit score impacts many facets of your life including getting a loan for a car or house and being approved for a credit card. Because a poor credit score can have such a negative impact on your life, it’s important that you frequently check your credit score. Experts recommend checking your credit report at least once a year to catch errors or identity theft.

2. APY

APY—or annual percentage yield—is your yearly compounded interest generally associated with a bank account. Every year, your financial institution will pay you a certain percentage of the money you keep in an account and the APY determines how much you receive.

[More from Manilla.com: Financial Tracking & Budgeting Basics]

3. APR

APR—or annual percentage rate of interest—works the other way around. APR is the interest that you pay a financial institution or creditor on loans or credit cards. Therefore, if you know you won’t be able to pay your credit card bill in full each month, choose a card with a lower APR.

4. Mortgage rate

A mortgage rate is the interest rate charged by a mortgage lender, in this case regarding home ownership. Before getting a loan, shop around for a financial institution that has a low mortgage rate because a house is a large investment, and paying an above-market interest rate is a waste of money. Once you’ve obtained a loan, you should know your mortgage rate so you can make sure you’re getting the best deal out there. If you happen upon a lower rate, consider refinancing your home to save money. Before you make your decision, calculate the “payback period” because refinancing fees can be expensive.

[More from Manilla.com: 10 Steps to a Financially Organized Life]

5. 401(k) Fees

Recently, NerdWallet published a study that calculated fees associated with companies’ 401k plans can actually reduce a two-income family’s return on investment by as much as $155,000 in a lifetime. Many of us are unaware of these costly fees. How it works is when you invest in a company’s 401k plan, the money is often used to purchase mutual funds, some of which charge high fees and front-end loads. These high fees are associated with active funds using managers who make the stock purchasing decisions. On the other hand, passive funds that follow a market index without an active manager generally have lower fees. Do some research to learn more about your company’s 401k plan and the funds it selects to ensure you’re getting the most out of your hard earned money.

This post was made using the Auto Blogging Software from WebMagnates.org This line will not appear when posts are made after activating the software to full version.

5 Financial Numbers You Should Know

iStockphoto

Financial literacy is an important, lifelong personal finance skill that everyone should have because it fosters careful spending and informed decision making. Responsible personal finance habits will guide you toward a life of financial freedom, and increasing your vocabulary of money words can only help. Here are five money definitions you should add to your financial literacy repertoire so you know how to get the most out of your money and financial decisions.

[More from Manilla.com: 5 Tips for Boosting Your Stock Portfolio]

1. Credit Score

Your credit score impacts many facets of your life including getting a loan for a car or house and being approved for a credit card. Because a poor credit score can have such a negative impact on your life, it’s important that you frequently check your credit score. Experts recommend checking your credit report at least once a year to catch errors or identity theft.

2. APY

APY—or annual percentage yield—is your yearly compounded interest generally associated with a bank account. Every year, your financial institution will pay you a certain percentage of the money you keep in an account and the APY determines how much you receive.

[More from Manilla.com: Financial Tracking & Budgeting Basics]

3. APR

APR—or annual percentage rate of interest—works the other way around. APR is the interest that you pay a financial institution or creditor on loans or credit cards. Therefore, if you know you won’t be able to pay your credit card bill in full each month, choose a card with a lower APR.

4. Mortgage rate

A mortgage rate is the interest rate charged by a mortgage lender, in this case regarding home ownership. Before getting a loan, shop around for a financial institution that has a low mortgage rate because a house is a large investment, and paying an above-market interest rate is a waste of money. Once you’ve obtained a loan, you should know your mortgage rate so you can make sure you’re getting the best deal out there. If you happen upon a lower rate, consider refinancing your home to save money. Before you make your decision, calculate the “payback period” because refinancing fees can be expensive.

[More from Manilla.com: 10 Steps to a Financially Organized Life]

5. 401(k) Fees

Recently, NerdWallet published a study that calculated fees associated with companies’ 401k plans can actually reduce a two-income family’s return on investment by as much as $155,000 in a lifetime. Many of us are unaware of these costly fees. How it works is when you invest in a company’s 401k plan, the money is often used to purchase mutual funds, some of which charge high fees and front-end loads. These high fees are associated with active funds using managers who make the stock purchasing decisions. On the other hand, passive funds that follow a market index without an active manager generally have lower fees. Do some research to learn more about your company’s 401k plan and the funds it selects to ensure you’re getting the most out of your hard earned money.

This post was made using the Auto Blogging Software from WebMagnates.org This line will not appear when posts are made after activating the software to full version.