Mortgage application eased back 5% in the week ending July 22 with both refinancing and purchase activity slipping. 

According to the Mortgage Bankers Association (MBA), the Refinance Index declined 5.5% to ~2583, while the Purchase Index fell 3.8% to ~177.

Contributing to the decline was an increase in mortgage rates with the average contract interest rate for 30-year fixed rate mortgages increasing to 4.57% from 4.54% with points increasing as well to 1.14% from 0.97 for 80% LTVs. 

In the prior week, the MBA attributed the gain in refinancing activity to lower mortgage rates and the expected decline in conforming loan limits on Oct. 1.  Another likely factor was noise related to the July 4 holiday.

As a percent of total application activity, refinancing share declined to 69.6% from 70.1%, while ARM share increased to 6.1% from 5.8%.

So far in July, refinancing activity is averaging 3.5% slower than in June as mortgage rates are slightly higher on average.  The slowing, however, will be more than offset by a jump in the number of collection days to 23 from 21 in July and contribute to speeds increasing less than 10% from July's estimates.

Speeds are expected to peak in August at well below 2010's peaks, however.  Looking at FNMA 4.5% and 5% 2008-2010 vintages, speeds are expected to prepay between 50% and 70% at last November's highs. 

For speeds to get closer to 2010's levels would require a substantial decline in mortgage rates that challenge their previous lows, Deutsche Bank Securities analysts said. 

However, as Wells Fargo analysts pointed out, "each subsequent lower low in the 30-year mortgage rate has resulted in a lower high in the refinance index." 

As a result, they "believe that the MBS market may be in for a secular slowdown in MBS prepayment rates."

The increase is anticipated to reverse in September as the number of collection days falls back to 21.

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