Mortgage rates dropped in the week ending July 14 in response to the sharp decline in yields following the much-weaker-than-expected jobs report, said Freddie Mac Chief Economist Frank Nothaft

The GSE's weekly survey reported 30-year fixed rate mortgages recovered all of last week's nine basis points increase, declining back to 4.51% with an average 0.7 point, which is two basis points above the year-to-date low.

Meanwhile, 15-year fixed rates declined to a new 2011 low of 3.65%, down 10 basis points over the week, and one-year ARM rates fell six basis points to 2.95% — matching its all-time record low.  Finally, 5/1 hybrid ARMs slipped just one basis point to 3.29%.

Despite the decline, not too much response is expected in refinancing activity in the Mortgage Bankers Association's (MBA) next report. 

Mortgage rates remain too high to draw in borrowers underlying the 4.5% coupon, while 5% coupons already have had plenty of opportunities to take advantage of favorable levels. 

For the week ending July 8, the MBA's Refinance Index dropped a seasonally adjusted 6.2% to ~2220, despite the improvement in mortgage rates.

At this time, prepayment speeds are expected to peak in August, which are reported in September, and be well off last year's peaks.

For example, 2008 and 2009 4.5s are projected at 23 and 16 CPR, respectively, compared to highs hit last November of 46 and 27 CPR. The 2008 and 2009 5s are predicted to prepay at 29 and 19 CPR versus highs last year of nearly 44 and 29. 

While mortgage rates are historically attractive, underwriting remains tight, mortgage bankers are still constrained, there are less Home Affordable Refinancing Program-eligible borrowers to refinance, and housing prices remain weak, as does the employment picture — all of which are restraining refinancing activity.


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