by Calculated Risk on 8/08/2007 01:22:00 PM

From Bloomberg: U.S. MBA's Mortgage Applications Index Rose 8.1% (hat tip Rich)

Mortgage applications in the U.S. rose last week by the most since January, as cheaper borrowing costs encouraged more Americans to seek loans for home purchases and refinancing.
...
A resilient labor market and lower home prices may support sales and eventually help reduce the glut of unsold properties, economists said. A report last week showed Americans signed more contracts to buy previously owned homes in June, a sign the weakness in the housing market may not get much worse.

"We're at the bottom right now in housing," said Mark Vitner, senior economist at Wachovia Corp. in Charlotte, North Carolina. "The biggest declines are over."

Uh, no.

Back in May I pointed out why the MBA Index is now useless: Is the MBA Index Currently Useless? Several analysts have noted that the relationship between housing sales and the MBA index has broken down. One reason is more borrowers are applying multiple times. From David Berson at Fannie Mae (note: this is a few months old, but the analysis is good): If purchase applications are stable, why are home sales so soft?

Click on graph for larger image.

One likely explanation [of the breakdown between sales and the MBA Index] is that the stricter guidance of depository institution regulators over the past year with respect to mortgage loans has made it more difficult for some households to qualify for a loan. As a result, those households have had to make multiple applications in order to get a mortgage loan -- thereby pushing up purchase applications without increasing home sales.

But I suspect the main reason for the breakdown in correlation between applications and sales is how the MBA survey is conducted. According to the MBA:

The survey covers approximately 50 percent of all U.S. retail residential mortgage originations, and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts.

Since another wave of lenders have recently closed shop, more potential buyers may be applying for loans from the lenders covered by the MBA survey. As an example, suppose 1000 people applied for loans in a given week from 10 lenders.

Lender 1: 250
Lender 2: 150
Lender 3: 100
Lender 4-10: remaining 50 applications each.

The MBA survey covers "approximately 50 percent of all U.S. retail residential mortgage originations", so in this example the MBA would only need to survey the top 3 lenders. Now if lender 10 closed shop (with 50 applicants), and the applicants all applied in equal proportions to the other lenders, the MBA index would increase 5% without any increase in overall activity.

This is most likely what happened last week.

Right now the MBA Index is not useful, and analysts that rely on the index are most likely wrong.