Despite the recent drop in mortgage rates, refi applications are not gaining as much momentum as the rather dramatic dip in rates should suggest. Some market experts said that this sharp decline in the MBA Index levels may mean a plunge in refi volume going forward, but others warn that the mortgage market may be back to where rapid prepayments are in danger of coming to the fore once again.

The MBA Refinance Index rose to 1320.6 for the week ending April 19, which was up by roughly 6% from the previous week's reading of 1246.1.This is in response to a 5% dip in mortgage rates. The more telling event was when the Freddie Mac 30-year survey rate dropped to 6.99% from 7.13% for the week ending April 12 - which is a 14 basis point drop - the Refi Index only rose by 3% in response to this rather remarkable plunge in rates.

Analysts said that both readings are rather tepid compared to historical experience starting in 2001, but still comparatively high if one looks at 2000 levels. For instance, according to a report by Countrywide Securities Corp., the highest print for the refi Index in 2000 was 795 (which was for the next to the last week of the year). Further, from the start of January to the end of November 2000, the refi index only averaged 412. So the latest reading of 1320.6 is really high, historically speaking.

2001 vs. 2002

"During the 2001 prepayment wave, a move of 10 basis points in rates generated, on average, a move of 395 points in the MBA," wrote Glenn Boyd, an associate director at the mortgage strategy group at UBS Warburg, in a report released last week. "But for the past four weeks, substantial swings in mortgage rates (from up 6 basis points, to down 14) hardly budged refi applications."

Boyd said that the sharp dip in MBA levels suggests an imminent drop in refinance volume. He added that based on the MBA Indices, refi volume should decline by more than a factor or two over the next two months.

"While it's not unusual for volume to outshine applications for a few months after a refi peak, we think pipeline backlogs are now easily under control," noted Boyd. "So we give partial credence to the picture being painted by the MBA indices - sudden homeowner ennui fostered by rates that are 1/2 point above recent low."

Though Boyd does not think muted homeowner response due to unattractive rate levels will temper prepayments by a factor of two, it may, however, hold back refi-response curves by a few CPR.

Some investors are fearing the loss of recent good times as consumers start responding to the dip in mortgage rates.

"Mortgages have been a good investment for a couple of months now based on the expectation that prepays were going to taper off and get pretty slow but we might be back on the camp where prepays are accelerating," said an investor, "I think people are starting to think, I sort of missed my opportunity to refinance.' So that gets off their short list of things to think about and now that you have the forces to make rates come down again, that might start getting people's attention to focus back in."

Title activity

The effect of declining mortgage rates is reflected by the expected rise in title activity. According to Mortgage Maxx LLC, a company that produces the Advance Factor Service Title Search Index (AFSTSX), with mortgage application activity beginning to trend up, the title index could reach the 200 to 210 range should the Freddie Mac 30-year survey rate remain in the 6.75% to 6.80% level. Mortgage Maxx models title search data generated at the beginning of the mortgage application process to forecast mortgage prepayments.

According to Mortgage Maxx CEO Paul Descloux, title activity this year tracked activity levels one year ago but only until March's rise in mortgage rates. Title activity only went up in 2001 to extremely high levels - above 300 - during the fall when 30-year mortgage rates reached an all-time low of 6.45 percent.

In his report to clients, Descloux said that it should be noted that last year, the AFS Title Search Index was above 200 for just eighteen weeks, while only rising above 210 twelve times. He feels that nominal 30-year rates in the Freddie survey would need to reach 6.5% to ignite the title index to go well above the 200 mark. However, even if rates reach last year's lows, it remains to be seen whether the AFS Title Search Index could reach very high levels due to the dwindling pool of borrowers who have the incentive to refinance 16 months into this prepayment wave.

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