Mortgage application activity declined 3.9% in the week ending Dec. 24 in response to higher mortgage rates and the year-end holiday slowdown. 

The Mortgage Bankers Association (MBA) reported a jump in the average contract interest rate for 30-year fixed mortgage rates to 4.93% from 4.84% for 80% LTV loans. 

As a result, the Refinance Index declined 7.2% to ~2038, its lowest level since the January 1, 2010 report. As a percent of total applications, refinancing share declined to 70.3% from 72.3%. Meanwhile, the Purchase Index rose 3.1% to 201 as affordability remains historically attractive.

For the week ending Dec. 31, a decline in the 30-year rate to 4.82% boosted refinancing activity after seven straight weeks of declines by 3.9% to ~2117, with refinancing share increasing to 71% from 70.3%.  

Meanwhile, the Purchase Index slipped 0.8% to 199. Overall, application activity rose 2.3%.

For the month of December, the Refinance Index averaged 2439, down nearly 36% from November's average as mortgage rates averaged 41 basis points higher to 4.71%. 

As a result, prepayments are projected to decline in January and February (reported respectively in February and March). 

At this time, prepayment speeds for 30-year conventional MBS are projected to decline 15% to 20% in January, and another 10% in February. Both months are impacted as well by lower collection days.

The issues facing borrowers — tight credit standards, mortgage banker constraints, poor home valuations, and a weak jobs market — are expected to persist this year, making refinancing difficult or too costly for many borrowers.

Additionally, mortgage rates are expected to creep higher over the course of 2011 from an estimated average of 4.7% in 2010.

Given the diminished refi response from borrowers, analysts with Barclays Capital analysts said, "There is little chance that speeds will be materially faster than in 2010."

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