Mortgage application activity declined 5.2% for the week ending July 1, according to the Mortgage Bankers Association (MBA).

"Stronger economic data towards the end of the week coupled with the end of the Fed's second round of quantitative easing helped bring mortgage rates to their highest level in over a month," said Michael Fratantoni, MBA vice president of research and economics. "Refinance activity, already constrained by a smaller pool of eligible borrowers, declined in response to the higher rates, but purchase applications picked up appreciably in the week before the July 4th holiday."

The Refinance Index dropped 9.2% to ~2367, its third straight week of declines, as the average contract interest rate for 30-year fixed mortgages jumped 23 basis points to 4.69%.

Refinancing share as a percent of total application activity fell to 66.4% from 69.5%. Meanwhile, the Purchase Index increased 4.8% to ~189.1 as borrowers took advantage of record level affordability.

For June, the Refinance Index averaged 5.2% higher than in May to ~2602 as mortgage rates averaged 13 basis points lower to 4.51%. 

Back in the summer of 2010 when mortgage rates were at similar levels, the Refinance Index averaged around 4000, moving to 5000 as mortgage rates declined to below 4.30%.

Rates need to drop to 4.0% to see a similar pop in refinancing activity, said most MBS analysts. 

As it is, rates are too high for 4.5% coupons to refinance, while borrowers underlying the 5% coupon have already had several opportunities.

Speeds are expected to increase about 5% each for July and August prepayments (reported respectively in August and September), which is when June's activity will have an impact,  

Day count slips by one day in July — this is more than offset by the increase in refinancing activity — while the number of collection days jumps to 23 in August. Levels remain below 2010's peaks.

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