The Washington Post noted that the Mortgage Bankers Association (MBA) mortgage application index for last week was 34 percent below its year ago level. This figure understates the decline in new mortgages for two reasons.
First, subprime lenders are under-represented in the MBA index. Since the decline in mortgages occurred disproportionately in the subprime segment of the market, the MBA index will not fully reflect this decline. Also, since many subprime lenders have cut back their lending or gone out of business, some of these borrowers may now be showing up at banks who are included in the MBA index.
The other reason that the MBA index understates the decline in mortgages is that it measures applications, not mortgages. Mortgage applications are far more likely to be turned down now than a year ago, which means that the same number of applications corresponds to fewer mortgages this year than last year.
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