Both refinancing and purchase activity rose in the week ending Oct. 22 as mortgage rates declined after rising in the previous week. 

The Mortgage Bankers Association (MBA) reported that the Refinance Index increased 3% to ~4626, after dropping over 11% in the previous week, while the Purchase Index was up 3.9% to ~177.

According to MBA's report, the average contract interest rate for 30-year fixed rate mortgages declined nine basis points to 4.25%, and matches the rate set at the end of September/early October which was the second lowest on record.

As a percent of total application activity, refinancing share remained almost the same at 82.3% compared with 82.4% previously. ARM share was also lower to 5.3% from 5.8%.

A factor that is limiting refinancing activity are lender capacity constraints, which is evidenced by the primary-secondary spread.

While mortgage lenders are adding capacity, Morgan Stanley analysts said in recent research that they believe the primary-secondary spread might not tighten by much.

Instead, they expect the rising costs for servicers related to foreclosures and increased scrutiny to reduce put-backs could keep the spread on the wider side.  This implies that the Refinance Index could remain capped at the 5000 area.

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