Mortgage application activity declined 4.5% in the week ending Feb. 17 with refinance and purchase activity lower, even as there was only a slight change in mortgage rates.

According to the Mortgage Bankers Association (MBA), mortgage rates were steady over the week with the average contract interest rate for 30-year fixed rate conforming loans at 4.09% versus 4.08% in the prior week, while the Federal Housing Administration loan rates were unchanged at 3.87%.

Despite historical rate levels, the Refinance Index declined 4.8% to ~4320. This was, however, the sixth straight week the index held above 4000.

As a percent of total applications, refinancing share was 80.1% versus 81.1% in the previous report.

Capacity constraints at mortgage lenders have kept primary-secondary spreads wide, which is preventing mortgage rates from declining further and refinancing activity from eclipsing 2011's high of 4867 hit in mid-August.

Morgan Stanley analysts said in research that in normal times, the 30-year fixed mortgage rate would be 50 basis points lower for the current level of rates.

So far in February, the Refinance Index is averaging over 8% higher than in January and is up nearly 27% since December. The increase over the past two months will begin to be reflected in the February prepayment reports, and more in March.

For example, speeds on 30-year MBS are currently projected to increase around 6%-7% on average in February from January, while March recorded additional strengthening of 10%-15%.

The gain is based on a combination of seasonals, Home Affordable Refinance Program as well as the rush by originators to close loans before the 10 basis points g-fee increase goes into effect on April 1.

Meanwhile, April slows around 2%-3% as the number of collection days drops to 20 from 22 in March.

Purchase activity was also lower by 2.9% to 161.8 and is at its lowest level since mid-October.

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