Mortgage demand drops as bank failures hit jumbo loan rates

Mortgage demand from homebuyers has been erratic to say the least during the usually busy spring housing market. That is likely because today’s buyers are hypersensitive to mortgage rates, which have been fluctuating widely week to week but which are still considerably higher than they were a year ago. Now, several bank failures are starting to make it more difficult even for wealthier buyers.

Mortgage applications to purchase a home dropped 2% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. Demand was 32% lower than the same week one year ago.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) decreased to 6.50% from 6.55%, with points remaining at 0.63 (including the origination fee) for loans with a 20% down payment. The rate was 5.36% the same week one year ago.

The average rate for jumbo loans (higher-balance mortgages) was slightly lower at 6.37%, but that spread has been shrinking for the last few months. Jumbo loan rates had been far lower than conforming because banks generally hold these loans on their balance sheets, as Fannie Mae and Freddie Mac don’t purchase them. Fannie and Freddie have imposed higher fees since the Great Recession, so their rates are now higher.

“The jumbo-conforming spread continues to narrow, an indication that there is reduced lender appetite for jumbo loans following the recent turmoil in the banking sector and heightened concerns about liquidity,” wrote Joel Kan, MBA’s deputy chief economist, in a release. “The spread was 13 basis points last week, after being as wide as 64 basis points in November 2022.”

Applications to refinance a home loan increased 1% from the previous week but were 51% lower than the same week one year ago. The refinance share of mortgage activity rose to 27.2% of total applications from 26.8% the previous week.

Mortgage rates were volatile to start this week, with more concern over bank failures and a much-anticipated Federal Reserve meeting Wednesday. The Fed is expected to raise its benchmark interest rate by a quarter point, but it will be the commentary from Fed Chairman Jerome Powell that will have the greatest impact on the bond market, and consequently mortgage rates.