Mortgage application activity increased 2.2% in the week ending Jan. 7 as refinancing activity picked up.

According to the Mortgage Bankers Association (MBA), the Refinance Index rose 4.9% to ~2221 in response to lower mortgage rates. As a percent of total applications, refinancing share increased to 72.1% from 71% previously. 

The average contract interest rate for 30-year fixed rate mortgages declined four basis points to 4.78%.

The MBA noted this is the second week in a row rates declined and since reaching a seven-month peak in the week ending Dec. 24, rates have improved 15 basis points. This has contributed to increased refinancing activity in the past two reports as well.

Still, refinancing activity remains relatively low for the level of mortgage rates. Additionally, the index is down sharply from early November — over 50%. As a result, prepayment speeds are projected to plunge in January and February, which will be reported in February and March, respectively.

The current outlook has conventional speeds declining 20% on average in January with 5s and lower showing the largest percentage declines at 25% to over 30%, respectively.

In addition to the decline in refinancing, the day count falls to 20 from 21 in December. In February, speeds are projected to decline an additional 15% to 20% with the day count at 19 with the lower half of the stack again registering the largest percent declines. 

Meanwhile, purchase activity remains sluggish despite the decline in mortgage rates. The Purchase Index dropped 3.7% to ~192, its second straight week of declines.

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