For the week ending June 22, the Refinance Index declined 8% to 4955 from 5386 - its highest level since April 2009. Over the previous two weeks, the index jumped 20% largely as a result of a surge in the Government Refinance Index as pre-June 2009 borrowers took advantage of a drop in mortgage insurance premiums on streamlined refinances that became effective June 11. Also, as a percent of total application activity, refinance share slipped to 79% from 81% previously.

"Refinance volume fell last week due largely to a fall-off in refinance applications for government loans, which had more than doubled the prior week," said Michael Fratantoni, Mortgage Bankers Association (MBA) vice president of research and economics.

As a result of the sharp increase in government refinance activity, some Street firms have already made upward revisions to their July prepayment outlook, which will be reported in August. Prior to last Wednesday's MBA report, GNMA I speeds were expected to increase by 10% on average in IFR Markets' sample for 3.5% through 5.5% coupons, but now it is estimated at 15%. In particular 2009 and 2008 vintages have been raised by around 2-3 CPR for 4.5s through 6.0s.

While speeds in July have been revised up to reflect the surge in application activity, August has likewise been revised lower to a 6% increase from a previous estimate of 9% as refinance demand is expected to be pulled forward. Clearly further revisions will be made based on today's release.

Mortgage rates remained historically attractive at or near record lows as the MBA reported the average contract interest rate for 30-year fixed rate conforming loans rose one basis point to 3.88%, while Federal Housing Administration rates eased one basis point to 3.72%.

Despite the attractive levels, refinance activity is becoming less responsive which is not unexpected based on history. As Barclays Capital analysts said in recent research: "When rates fall to new lows, the refinance index tends to spike but then taper off."

For example, in February when rates hit a new low of 3.87% the Refinance Index hit 4538, its highest level since mid-August 2011. It then subsequently declined over the next six weeks even though mortgage rates remained below 4.0%. In August 2011, the index surged to 4867 - its highest level since October 2010's 5060 print -- as mortgage rates improved to 4.30% area from nearer 5.0% through the early part of 2011.

Purchase activity was also lower with the index dipping 1% to 185 after a 9% decline in the previous week.

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