Mortgage Applications up 8.1%: Does it really mean the market is recovering?

Bloomberg.com released a story that states that the MBA is reporting an 8.1% increase in the number of mortgage applications last week. Some of the main reasons given for this increase include a rate drop to 6.41%, steady labor market, and lower home prices. The rate is the lowest it has been since early June, 2007. While this is good news and it seems to hint that the housing market has reached the bottom the news is not all good. Although mortgage applications are up there are still issues related to the amount of money available to borrowers. Most people are aware of the subprime mortgage crash but the recent news that Alt-A mortgages are also in trouble is not so widely known.

According to Market Watch the number of Alt-A loans experiencing delinquencies are increasing and this has caused S&P to consider downgrading 207 classes of Alt-A mortgage-backed securities. Because of this there are fewer investors willing to invest in Alt-A mortgage backed securities there is less money available for borrowers who qualify for Alt-A loans. Less money available means that lenders need to be more selective when approving mortgage loans and that means fewer people will actually receive approvals on their mortgage applications.

By lending money to consumers who were on shaky ground mortgage lenders have helped create a situation ripe for defaults. When too many people default on their loans investors start losing money. This leads to fewer investors willing to invest in mortgage-backed securities. This issue needs to be fixed before the market can rebound. After all it does not matter how many people apply for loans if there is a a very limited amount of money available. While the consumer side of the housing market seems to be moving in the right direction the market can't move up until the mortgage issues are taken care of and that may take more time and stronger lending regulations.