Despite lower mortgage rates in the week ending May 27, mortgage application activity slipped 4% with both refinancing and purchase activity lower.

Michael Fratantoni, Mortgage Bankers Association (MBA) vice president of research and economics attributed the decline in rates to weaker than anticipated economic news. 

"Despite this drop in rates, the number of refinance applications fell. In fact, the last time mortgage rates were this low, refinance volume was more than twenty percent higher," Fratantoni said. "It is likely that many borrowers still cannot qualify to refinance given the lack of equity in their homes."

Indeed, yesterday Standard & Poor's/Case-Shiller reported home prices declined 4.2% in the 1Q11 and hit a new low. They reported that nationally, home prices are back to mid-2002 levels.

According to the MBA, the average contract interest rate for 30-year fixed rate mortgages dropped 11 basis points to 4.58% and is at its lowest level since last November. Meanwhile, the Refinace Index fell 5.7% to ~2444, while the Purchase Index was essentially flat at ~192.

As a percent of total applications, refinancing share declined to 65.7% from 66.8%, while the ARM share was slightly higher to 6.2% from 5.8%.

For May, mortgage rates averaged 4.64%, according to Freddie Mac's survey, down 20 basis points from April's average.

In response to the rates, the Refinance Index was 24% higher on average to 2468. For the June prepayment report where this will be an influence, there is a modest pickup in speeds seen of around 5% to 10%, with an increase in the day count to 22 from 21 also impacting speeds. However, speeds are projected to reverse in July as the day count drops back to 20.

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