Mortgage applications surged 15.5% in the week ending July 15, said the Mortgage Bankers Association, with the Refi Index jumping 23.1% to ~2733 - its highest level since mid-June.  As a percent of total applications, refinancing share increased to its highest level since January to 70.1% from 65.6% previously. The Purchase Index was unchanged at 184.

Michael Fratantoni, MBA's Vice President of Research and Economics attributed the increase in part to mortgage rates moving back to their lowest level of the year in response to the flight to safety on the European debt crisis.  However, more likely was the second factor that he mentioned: "borrowers potentially impacted by impending decreases in the conforming loan limit may be opting to lock in fixed-rate financing now."

Effective October 1, the conforming loan limit for agency mortgages will drop back to $625,500 from the temporary higher limit of $729,750.  In comments from Deutsche Bank, analysts warned that prepayments on loans above $625,500 level could surge before the deadline; however, they added that lowering the limit was an overall positive for the MBS basis longer term as supply is likely to be lower and convexity better due to the smaller loan size.  There is some effort Congress to extend the higher conforming loan limits for another two years with a bill recently introduced by Reps John Campbell (R-CA) and Gary Ackerman (D-NY).

Mortgage rates were stable over the week with the MBA's survey reporting the average contract interest rate for 30- and 15-year fixed rate lows declining by one and two basis points, respectively, to 4.54% and 3.66%.  The 15-year rate is at its lowest level since early October 2010.

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