The Mortgage Bankers Association (MBA) reported this morning that its seasonally adjusted refinancing index dropped to 6657.2, for the week ending July 11, 2003, from 6768.3 the previous week. This was a 2% drop. Compared to the prior week’s raw number, the refinancing index increased 23%. The small amount of the drop (versus the holiday-adjusted value for the week prior) is slightly surprising, considering a significant 15 basis point rise in mortgage rates, said Citigroup in a report released this morning.

“It is likely that the MBA underestimated the strength of the holiday-related slowdown during the week of July 4,” Citigroup wrote. They said that if a 1.5-day adjustment is assumed for July 4 (rather than one-day adjustment that the MBA used), the index declines for the weeks of July 4 and July 11 would have been 11% and 14%, respectively. These dips are more in line with interest rate increases over these two weeks.

Mortgage rates started climbing after a short rally at the end of the past week. On Tuesday, July 15, secondary market mortgage rates rose by over 20 basis points. Citigroup said that although the backup has not filtered through to the primary market, primary market rates are expected to do a catch up with secondary market rates soon. Citigroup’s survey of lenders’ Web sites showed no-point rates varying between 5.5% and 6.125%. The spread between primary and secondary market mortgage rates has tightened considerably to roughly 40 to 45 basis points. The firm expects tomorrow’s Freddie Mac Survey Rate, which reflects mortgage rates at the beginning of the week, to rise to roughly 5.60%.

The firm added that the recent backup in mortgage rates pushed 5.5s from being fully refinancible to only being partially refinancible. But 6s are still fully refinancible. Citigroup also noted that the backup in mortgage rates sharply reduced the percentage of the mortgage universe that is refinancible. To illustrate, only about 60% of the 30-year conventional mortgage universe is currently refinancible. In contrast, just in mid-June, 80% of the mortgage universe was callable.

In terms of prepayment speeds, Citigroup said that July speeds might be even higher due to several factors. One of them is that the MBA Conventional Fixed-Rate Index rose by 5% to 10% in June compared May. Refinancing activity increased by roughly 15%, while purchasing activity rose slightly — less than 4%.

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