Mortgage application activity increased 2.7% for the week ending March 18 in response to attractive mortgage rate levels. 

The Mortgage Bankers Association (MBA) reported the average contract rate for 30-year fixed mortgages was 4.80%, up one basis point. However, points declined to 0.96 from 1.07 for 80% LTV loans, thus lowering the effective rate.  

In response, the Refinance Index was up 2.7% to ~2471, its highest level since mid-December. The Purchase Index also gained 2.7% to ~192, its best level since the beginning of this year.

As a percent of total application activity, refinance share was unchanged at 66.4%. Meanwhile, ARM share rose to 5.9% from 5.6%. 

Refinance opportunities for credit-eligible borrowers are expected to generally deteriorate over the year as interest rates are anticipated to increase as the economy continues to recover and the Fed begins the process of removing its accommodative stance.

Currently, 30-year mortgage rates are expected to average 5.5% by 4Q11 and be over 6% by the end of 2012.

As a result, refinancing activity is projected to decline to 29% by 4Q11 and to hold around that area through 2012.

Purchase originations are also seen overtaking refinancing originations beginning this year.  As a result, prepayments are expected to remain relatively benign.

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