The Mortgage Bankers Association (MBA) reported this morning that the Refinancing Index dropped 20% to 3238.4 from 4047.5 last week.

The decline in the index happened despite of a slight week-over-week drop in weekly average mortgage rates, said a Citigroup report. “It appears that the number of borrowers still willing to refinance at current relatively high rates (more than 100 basis points above the June lows) diminishes every week,” stated the firm.

With purchase activity dropping about 11% week-over-week, the MBA Total Market Index dipped by approximately 16%. However, the refinancing share (at about 50%) is still relatively high.

Mortgage rates have rallied by 25bp to 30bp since the beginning of August, said Citigroup. But, despite the rally, mortgage rates are still more than 100bp above June lows. The firm’s survey of lenders’ Web sites shows that no-point rates now vary between 6.25% and 6.625%. Meanwhile, the spread between primary and secondary market mortgage rates is about 20 to 25 basis points below its peak reached in mid June.

Citigroup expects the Freddie Mac Survey Rate— which will be released tomorrow and will reflect mortgage rates in effect at the start of the week — to drop to roughly 6.20%.The firm added that with Freddie’s survey rate expected to be slightly less this week than the week before, all coupons have moved a little deeper into the money. For instance, the refinancing incentive of 6.5s rose above 75 basis points. Analysts consider this level be “a threshold of full refinanciability. ”

Citigroup estimates that about 30% of the 30-year mortgage universe is now refinanciable. In contrast, back in July, on average 55% of the mortgage universe was refinanciable. The difference is more pronounced when compared to June 2003, when the share of refinaciable 30-year mortgages was 80%.

Meanwhile, the MBA Government Refinancing Index declined by 22% while the MBA Conventional Refinancing Index dropped less than 20%. The ARM share of applications rose to about 34%, from 33% the previous week.

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