Refinancing activity declined last week as expected in response to higher mortgage rates.

The Mortgage Bankers Association reported that the average contract interest rate for 30-year fixed mortgage rates jumped 44 basis points to 5.25%. In response, the Refinance Index dropped 24.1% to 2953.6 in the week ending May 29. As a percent of total applications, refinancing share dropped to 62.4% from 69.3. These are the lowest levels for both indexes since early February.

For the month of May, the Refinace Index averaged 4057, down 31.7% from April's average. Mortgage rates averaged 4.86%, just five basis points higher than the previous month according to Freddie Mac. While there are various reasons contributing to the poor response in refinancing activity relative to record low mortgage rate levels, what it does point to is lower prepayment expectations over the near term.

The Street's prepayment speed outlooks for June and July have been revised downward. Previously,the consensus estimate had been for about a 10% increase in FNMAs for June prepayments, which will be reported in July while Ginnies were expected to be around 5% higher. GNMAs are now projected to be half of that now. Although July estimates had been projected to remain the same from the previous month, the new projections are now about 5% slower in aggregate.

The Purchase Index, meanwhile, rose 4.3% to 267.7 as homebuyers are taking advantage of the record high housing affordability and the $8,000 tax credit for first-time homebuyers.

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