Overall, mortgage application activity increased 9.3% in the week ending Sept. 23 with the Refinance Index, specifically surging 11.2% to ~4240.

"Mortgage rates declined last week, at least partially in response to the Fed's announcement that they would shift their portfolio towards longer-term Treasury securities, and that they would resume buying mortgage-backed securities," said Michael Fratantoni, Mortgage Bankers Association (MBA) vice president of research and economics. "With lower rates, refinance application volume increased to its highest level since August 19, 2011. Purchase application volume also increased."

As a percent of total applications, the refinance share rose to 79.7% from 78.3% previously. This is the highest the refinancing share has been since the survey's re-benchmark in January 2011, said the MBA.  Meanwhile, the Purchase Index increased 2.6% to ~177. 

"However, the increase was in conventional purchase applications, which were up by 4.9%,"  Fratantoni said. "Purchase applications for government loans fell by 0.6 percent over the week, likely influenced by the pending decline in FHA loan limits."

The increase in the Refinance Index was higher than expected. At this time, UBS believes mortgage rates need to drop to 3.80% to reach the same peak in speeds experienced in November 2010. 

Based on the MBA's expanded survey coverage to 75% of the retail market from 50%, UBS analyst Jeffrey Ho equated this to around 5750 on the Refinance Index.

Still, activity is being inhibited as many borrowers are not qualifying for the headline low rate. Barclays Capital analysts pointed out that Freddie Mac's survey rate is aimed primarily at purchase loans and this has become more evident since 4Q09. 

Starting at that time, they said the gross weighted average coupon (WAC) of a refinance loan is 10 basis points to 20 basis points higher than the gross WAC of a purchase loan after controlling for FICO, LTV and even points paid up front (purchase loans). 

They added that looking at rates quoted by the four major lenders and controlling for term, loan size, FICO, LTV, geography, and upfront points revealed that almost all of them quoted rates on refis at 15-50 basis points higher than a purchase loan.

It is unclear why refinance loan rates are higher than purchase loans, but Barclays suggested it could be related to increased putback risk, which, in turn, is discouraging lenders to underwrite loans that were originated by another lender, while hedging purchase loans may be cheaper due to lower pull-through risk than hedging refi loans.

The expanded MBA release reported the average loan size for purchase loans was $212,700 in August compared to $211,200 in July. The average loan size for refis was $241,300, up from $209,200 in July. The increase was likely due to the expiring of the higher jumbo conforming loan limits at the end of September.

The average contract rate for 30-year fixed mortgages with conforming loan balances $417,500 or less) declined four basis points to 4.25%. The Jumbo mortgage rate also fell four basis points to 4.51%, while the Federal Housing Administration loan rate slipped two basis points to 4.05%.

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