Mortgage application declined 2.5% for the week ending Aug. 31 despite easing in mortgage rate levels.

The Mortgage Bankers Association (MBA) reported the Refinance Index was down 3% to roughly 4217 on a seasonally adjusted basis, its lowest level since early May, while the Purchase Index slipped 0.8% to 178.

The activity slowdown was not unexpected, in part, due to end of summer vacations into a long Labor Day weekend.

In addition, while the contract interest rate for 30-year conforming fixed rate lows averaged 3.78% from 3.80% and Federal Housing Administration rates were lower by six basis points to 3.60%, many borrowers already responded to the historically attractive rate levels that have existed for much of this year.

Rates will have to decline well below July's record low 3.49% for the Refinance Index to return near the recent peak of 5453.

For the month of August, the Refinance Index averaged 8% lower than in July as mortgage rates increased to a 3.60% average from 3.55%. This as well as a lower number of collection days in September will lead to slower prepayments with speeds projected to decline between 5% and 10% from a predicted increase of 5% to 10% in August.

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