Refinancing activity recovered from the holiday decline with the seasonally adjusted Refinance Index gaining 21.8% to ~2407 for the week ending Jan. 8, according to the Mortgage Bankers Association (MBA).

As a percent of total application activity, refinancing share rose to 71.5% after falling to 68.2% in the prior week — its lowest level since the end of October. 

The Purchase Index was also higher by 0.8% by ~214 as it continues to benefit from the homebuyers tax credit. 

The average contract interest rate for 30-year mortgages also eased to 5.13% from 5.18%. While rates are historically attractive, refinancing activity is expected to remain relatively muted unless rates drop to below 4.5%. 

Prepayment speeds are expected to decline on aggregate in January as a result of a lower number of collection days —19 versus 22 in December as well as on a 6% plus decline in refinancing activity last month as mortgage rates moved higher and the holidays intruded. 

Initial indications suggest speeds will slow 8% on average for 30-year FNMAs, with the largest percentage declines coming in 5s and 5.5s. 

In terms of the February prepayment report, speeds are expected to slow by around 10-15% on average, while in March speeds are seen increasing 10% to 20% as the day count increases to 23 days from 19 in February and seasonals begin to strengthen. 

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