Mortgage application activity held fairly steady in the week ending May 11. The Mortgage Bankers Association reported that the Refinance Index remained basically unchanged at 2115.5 compared with 2115.2 in the previous survey, while the Purchase Index slipped just 1.4% to 432.3 from 438.3. This was in line with expectations as mortgage rates remained virtually unchanged during that week. A year ago the Refinance Index stood at 1547 with mortgage rates in the high 6.50% area.

As a percent of total application activity, refinance share increased to 42.1% from 41.8%. Meanwhile, ARM share slipped further to 17.4% from 18%.

There are some questions about the level of the Purchase Index given the recent existing and new sales reports remaining on the bearish side. JPMorgan Securities analysts addressed this in recent research.

One thought is that the index may be inflated from buyers filing multiple applications with different lenders as a result of the tighter lending standards. However, analysts do not believe this is the case since there are costs associated with filing an application. Furthermore, the current environment is a buyer's market as opposed to a seller's market, so there is less concern on the part of the borrower about losing a purchase contract as a result of a delay in getting a loan approval.

Another factor might be that bankruptcies and consolidations in the origination community are leading to more applications being filed with fewer lenders that have better representation in the MBA's survey. The MBA calculates its index based on weekly percentage changes in the volume that is reported by the survey participants and weighs them by the relative market shares. This could be inflating the Purchase Index readings, analysts said.

Meanwhile, Freddie Mac's survey reported higher mortgage rates on the steady backup in yields since around the time of the Federal Open Market Committee's meeting. The 30-year fixed mortgage rate rose to 6.21% from 6.15% previously. Mortgage rates had been steadily slipping since the April 13 week after hitting a near-term high of 6.22%. A year ago, 30-year fixed mortgage rates were 40 basis points higher at 6.60%.

Meanwhile, 15-year fixed mortgage rates increased five basis points to 5.92%; five-year hybrid ARMs were up three basis points to 5.92% also; and one-year ARM rates were unchanged at 5.48%.

Freddie Mac's Chief Economist Frank Nothaft does not expect any big movement in mortgage rates "as long as core inflation continues to trend downward and economic growth remains subpar."

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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