Mortgage Applications Fall as Interest Rates Jump

The Mortgage Bankers Association reported an 8.8% decline in its index of applications.  The purchase index decreased 4.4%, while the refinancing gauge lost 15%.  The average rate on a 30-year fixed loan rose to 6.57% from 6.24%, while the rate on a 15-year fixed increased to 6.14% from 5.78%.  Interest rates on one-year adjustable mortgages jumped to 7.22% from 6.87%.  I find this last data point to be particularly interesting.  The yield curve is steep, short term interest rates in the bond market are still much lower than long term rates, yet banks are offering ARMs at much higher rates than 30-year fixed loans.  Why the discrepancy?  Banks can still securitize 30-year and 15-year fixed rates and sell them to Fannie and Freddie.  However, with the freeze in credit markets, they can't unload ARMs, so they must carry them on their balance sheets.  But with no room on their bloated balance sheets, they charge an ARM and a leg (pun intended) if borrowers want an adjustable loan.  According to the MBA, the share of applicants seeking variable-rate loans fell to 9.7% last week.  Seriously, who are these people who are trying to get a variable rate loan with a higher interest rate than a fixed?  More importantly, who are their mortgage brokers?  I would be very interested in hearing the sales pitch:

Borrower:  So, why wouldn't I just get a 30-year fixed?

Mortgage broker:  An adjustable is much better.  You need to lock in now before rates go higher.

Borrower:  But won't the adjustable rate just go higher when rates go higher?

Mortgage broker:  You don't understand.  The rates will adjust lower when interest rates go down.

Borrower:  But I thought you just said rates are going higher.

Mortgage broker:  They are, but when they go lower, your adjustable will adjust lower.

Borrower:  Can you show me some estimates of what my payments will be based on a few interest rate scenarios?

Mortgage broker: (laughing)  Don't be ridiculous!  Mortgage math is very complicated.  You need complicated models to figure this stuff out.  You have to trust me on this.  Do you think I would've survived in this business for this long if I didn't care about relationships with my customers?

Borrower:  I know sonny.  I'm your grandmother.  I'm happy to see your business has been flourishing.

Mortgage broker:  Just sign right here.  Great!  Now, let's start talking about a cash-out refi...