Mortgage application activity declined in the week ending Oct. 15 as mortgage rates backed up, according to the Mortgage Bankers Association's (MBA) weekly report.

The MBA reported that the average contract interest rate for 30-year fixed rate mortgages jumped 13 basis points to 4.34% from a record low 4.21%.

In response, the Refinance Index dropped 11.2% to ~4492 after jumping 21% to 5059 in the prior week to its second highest level of the year.

As a percent of total applications, refinancing share fell to 82.4% from 83.1% — its highest level since January 2009.

This is a similar response seen in late August when the Refinance Index rose above 5085 on record low mortgage rate levels, only to steadily decline in the following five weeks to 4181 —even as mortgage rates held in historically low territory.

A contributing factor is the capacity constraints at mortgage lenders. Although these firms are adding capacity, it is not a fast process.

Barclays Capital analysts said this week that, "origination capacity can only handle about a 5000 refinancing index."

As such, analysts believe that prepayment speeds will not change that much from what they have been projecting for November and December, which be reported in December and January.

Indeed, consensus showed the outlook for speeds for 30-year FNMA speeds in November is essentially remained flat from October on aggregate as well as by coupon and vintage.

Meanwhile the Purchase Index slipped 6.7% to ~170. The index has declined in the past two weeks following an increase in the FHA MIP that became effective on Oct. 4.

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