Mortgage application activity increased 7.6% in the week ending July 16 with refinancing and purchase activity higher. 

The Mortgage Bankers Association (MBA) reported that the Refinance Index jumped 8.6% to ~4161 — its highest level since mid-May 2009. This happened as the average contract rate for 30-year fixed rate mortgages declined 10 basis points to 4.59% (with 1.04 points/80 LTV), which is the lowest the rate has been on record.

As a percent of mortgage applications, the refinance share jumped to 79.4% from 78.7%. The MBA said that this is the highest share since April 2009.

Meanwhile, the Purchase Index rose for the first time in four weeks by 3.4% to ~170. 

"The strength in purchase applications comes from government loans, likely indicating that prospective buyers are drawn by the lower downpayment requirements,"  Michael Fratantoni, MBA's vice president of research and economics, noted.   

While higher, application activity still is only modestly responsive to the record low mortgage rates. Tight credit conditions will continue to weigh on borrowers ability to refinance, and thus limit prepayment speeds.
 
In a presentation, Credit Suisse analysts said that only borrowers with pristine credit and documentation can get the current low mortgage rates that are broadly quoted, and these borrowers are primarily in the 2009 4.5% and 5% vintages.  

For now, JPMorgan Securities analysts said the only risk from moving to a refinance wave from a "wavelet" is if the government eliminates the various hurdles, including capacity constraints, which many borrowers face when they refinance. Analysts believe that such a policy would be difficult to implement. 

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