With both refinancing and purchase activity lower, mortgage application activity declined 5.0% in the week ending Jan. 20.

According to the Mortgage Bankers Association, the Refinance Index fell 5.2% to 4265.3, while the Purchase Index was down a similar 5.4% to 184.8.

Contributing to the reduced activity was an increase in 30-year fixed conforming rates to 4.11% from 4.06, while 15-year fixed rates rose seven basis points to 3.40.  Specifically helping the prior week's jump was pent-up demand following the year-end holiday distractions and this appears now to have passed. 

As a percent of total applications, refinancing share declined to 81.3% from 82.2%. This is its highest level since October 2010. Meanwhile, ARM share was at 5.3% from 5.6% previously.

Unless mortgage rates drop toward 3.80%, the Refinance Index is not expected to breach the highs of 2011 and 2010 of 4800 and 5000.  

Still refinancing activity should be buoyed to some extent in the coming weeks and months by HARP 2.0 and the g-fee increase, which becomes effective on April 1. 

Activity associated with the g-fee increases is expected to show up in February, Nomura Securities analysts said.  

Additionally, Morgan Stanley analysts have also noted that some originators are requiring correspondents to close loans by Feb. 29 to avoid paying the new g-fees. "Thus, there is likely to be a rush to close loan applications by Feb 29," they added.  

Meanwhile, HARP activity is expected to become more noticeable beginning in March as FNMA's DU will be updated for the HARP changes.

So far in January, the Refinance Index is averaging nearly 17% higher than in December as a result of the historically low mortgage rate levels, as well as, the pent-up demand.   

Prepayment response from the gain is expected to be primarily reflected in the March report (released in April), with slight impact seen in February's.

In February and March, prepayments are expected higher with speeds in March projected to have increased 8% from February's 3%-4% expected rise.

Day count in February holds at 20 and increases to 22 in March.  Prepayment speeds currently are expected to slow around 2%-3% on average for 30-year conventional and GNMAs and 15-year FNMAs. 

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