Mortgage application activity was essentially flat in the week ending July 27, as a decline in purchase activity offset a slight 0.8% increase to roughly 5464 on the Refinance Index - its highest level since mid-April 2009, according to the Mortgage Bankers Association (MBA).

A muted response was expected despite mortgage rate levels given that many borrowers have already responded to the historical low levels. Mortgage rates have set new lows in 11 of the past 13 weeks, with one week holding at the prior week's low.

Meanwhile, the Government Refinance Index declined 6%. However, activity remained at an elevated level of roughly 5236. This supports the expectation that speeds in August on certain GNMA cohorts will be little changed from July.

Speeds on 30-year GNMAs are projected to surge around 40% in July on average with 2008 vintage 4.5s projected to increase 68% to 57 CPR. The 2008, 2007 and 2006 5.0s are expected to surge to 48, 52, and 52 from 33, 21 and 26 due to the lowering of the upfront and annual mortgage insurance premiums on streamlined refinances for pre-June 2009 borrowers.

Despite record affordability, the Purchase Index declined 2% to 182. Inventory issues may be a factor. In a recent housing report from the National Association of Realtors, chief economist Lawrence Yun said that "We’ve been seeing a steady decline in the level of housing inventory, which is most pronounced in the lower price ranges popular with first-time buyers and investors."

The MBA also reported the average contract interest rate for 30-year fixed-rate conforming loans rose one basis point to 3.75%, while Federal Housing Administration (FHA) rates held at a record 3.52%.

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