The Refinance Index surged 30.4% to ~3630.5 for the week ending Aug. 5 as the 30-year average contract interest rate declined eight basis points to 4.37%.

As a percent of total applications, refinancing share jumped to 75.6% from 70.1% — its highest share since mid-December.

"Amid substantial market turmoil last week, mortgage rates dropped to their lowest levels of the year, and refinance applications jumped more than 30 percent to their highest levels of the year," said Michael Fratantoni, Mortgage Bankers Association's vice president of research and economics.

Not surprisingly, a major contributor to the increase was Jumbo loan applications that increased by nearly 75% from the prior week, Fratantoni said. 

Unless Congress passes a bill, at this time the conforming loan limits for agency MBS are set to drop back to $625,500 from the temporary higher limit of $729,750 on Oct. 1.

Refinance activity was in the range of expectations, but remains well below its 5000 high of 2010 when mortgage rates dropped to a record low 4.17%. If mortgage rates reach 2010's low,

JPMorgan Securities analysts believe that the index will peak at just 4000 given the smaller universe of eligible borrowers due to the state of the housing market.

For refinancings to reach last year's highs, UBS analysts projected a 3.80% rate is needed, which they think corresponded to a 1.90% 10-year note yield, while Barclays Capital analysts believe rates need to drop to 4.15% and 10-year notes to rally through 2%. 

Deutsche Bank Securities analysts think capacity constraints will likely keep the primary mortgage rate from declining through 4% as originators will be flooded with applications to refinance given the sizeable amount of outstanding loans just below 5%.

Meanwhile, the Purchase Index was unresponsive to the improved mortgage rate levels, declining 0.9% to ~184.4.

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