The seasonally adjusted application volume index fell by 7.7% from the previous week as mortgage rates shot up to their highest point since last spring because of stronger economic growth than anticipated, according to new figures released by the Mortgage Bankers Association (MBA).
Refinance applications fell by 7.7%, while the seasonally adjusted purchase application index dropped 1.4%.
The average contract interest rate for 30-year fixed-rate mortgages increased from 4.81% to 5.13%, with points decreasing from 1.02 to 0.84 (including the origination fee) for 80% loan-to-value ratio loans.
The average contract interest rate for the 15-year FRM increased from 4.13% to 4.29%. Points increased from 1.01 from 1.02.
Scott Buchta, an analyst with Braver Stern, said, "With the majority of high quality borrowers having already refinanced at lower rates, we would expect to see (the refi) index begin to drift lower in the coming weeks but not drop dramatically so."
This is because 50% of the current mortgage universe is outside of the refi window. Furthermore, the rise in the effective rate on 30-year fixed rate loans to 5.3% removed the economic incentive for those in the 5.0% coupon to refinance, he said.
"The majority of borrowers remaining in higher coupon pools are credit constrained and will be less affected by a rise in mortgage rates from here. We would expect to see prepayments in the 5.5% and 6.0% coupons become much more involuntary in nature, especially once the new loan level pricing adjustment fees come on line.
"The slow down in premium speeds may be delayed until the second half of the year, however, as originators make a push to refinance underwater borrowers under the [Home Affordable Refinance Program] before it expires in June," Buchta said.
He noted the effective rate for FHA loans was now at 5.6%, which he said not only affects refis, but also purchases by first-time homebuyers who rely on this program.
Michael Fratantoni, MBA's vice president of research and economics, said: "Mortgage rates increased last week as many incoming economic indicators continue to show stronger growth than had been anticipated. We are at the beginning of the spring buying season, but purchase volume remains weak on a seasonally adjusted basis."
The market share of refinancing applications was 66.6%, down from 69.3% one week prior, it's lowest level since last May. MBA tracks activity through its proprietary application index.