Refinancing activity plunged in the final two weeks of 2009 due to a jump in mortgage rates and consumers being distracted by the holidays.

According to the Mortgage Bankers Association (MBA), by the week ending Jan. 1, the average contract interest rate for 30-year fixed rate mortgages was at 5.18%, up 26 basis points from 4.92% recorded for the week ending Dec. 18.

In response to that as well as the holidays, the Refinance Index dropped 30.5% in the week ending Dec. 25 and another 1.6% for the week ending Jan. 1.

The index stands at ~1976, down from 2890 in mid-December, and is at its lowest level since early August.

As a percent of total application activity, refinancing share is at 68.2% compared with 75.9% as of the week ending Dec. 18. Some recovery is expected with the holidays past.

Purchase activity was mixed with the index slipping 4% to ~205 for the week ending Christmas Day, and then partially recovering by 3.6% in the following week to ~213.

For the month of December, the Refinance Index averaged around 2655, down 10% from November's average as mortgage rates averaged an attractive 4.93%, just five basis points higher from the previous month.

Given the decline, prepayments in January and February (reported in February and March, respectively) are expected to be flat to lower overall.

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