After holding above 4000 for eight straight weeks, the Refinance Index fell 4.1% to ~3972, according the Mortgage Bankers Association (MBA).

As a percent of total applications, refinancing share was 75.1%, down from 77% in the previous week. It is also at its lowest level since late November.

Over the week, the effective rate for 30-year fixed conforming loans was lower in response to an unchanged contract rate of 4.06% while points were lower.

Meanwhile, Federal Housing Administration rates were down five basis points to 3.82% to its lowest level of 2012.

"Although rates were unchanged on average, they trended up through the course of the week, and this likely discouraged many potential refinance applicants," said Michael Fratantoni, vice president of research and economics at the MBA.

The notable thing about this report was the increased Home Affordable Refinance Program (HARP) volume. According to Fratantoni, HARP volume is still growing as a share of total refinance volume, reaching about 30% of refinance activity over the last couple of weeks.

"Typical HARP loans had loan-to-value ratios above 90%, indicating that lenders are reaching out to underwater borrowers," he said.

In the recent February prepayment report, HARP 2.0 activity was starting to filter through and is projected to become more so in coming months.

JPMorgan Chase and Wells Fargo pools were the most responsive across all high-LTV borrower base in February, noted JPMorgan Securities analysts. Meanwhile, Citi appears to have exhibited "a greater embrace of the program," said Morgan Stanley analysts.

Bank of America remains the laggard, although in a December press release it stated that it expected to "significantly increase the number of customers we can help save money on their monthly payments."

JPMorgan analysts have been the most aggressive on their expectation of HARP 2.0's impact and said that the recent prepayment news "reinforced our view that the HARP effect should add about 10 CPR to legacy super premium speeds."

In addition, they think higher LTV loans are particularly vulnerable "to the paradigm shift underway." Given this risk, they recommended that investors avoid the HARP-able universe and focus on relative value in the post-HARP sector.

The Purchase Index, meanwhile, increased 4.4% to ~187, its highest level since mid-January, and up 12% from a month ago.

Fratantoni, however, poured some cold water on the report saying "this level of purchase activity, adjusted or unadjusted, was essentially unchanged when compared to the same time last year. Purchase activity remains subdued and within the narrow range we have seen since the expiration of the homebuyer tax credit in 2010."

As the Federal Open Market Committee statement noted again yesterday, "The housing sector remains depressed."

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