The Mortgage Bankers Association reported that the Refinancing Index dropped 22.1% to 2340.1, from 3005.5 the prior week.

A Citigroup Global Markets report this morning stated that the drop in the Index was likely the result of the following: 1) Columbus Day may have sent potential borrowers on early vacations last week; and 2) the average mortgage rate increased 20 basis points week-over-week. As of yesterday, Oct. 14, Citi said that primary mortgage rates were about 60 basis points below August peaks and approximately 80 basis points over the record lows seen in June.

The firm’s survey of lenders’ Web sites indicates that primary mortgage rates vary between 5.75% and 6.375%. The spread between primary and secondary market rates dipped below 35 basis points in the past week. This implies that lenders have sufficient capacity to process incoming applications without a substantial backlog. It also shows that lenders are willing to operate at tighter margins to attract more borrowers.

Citi expects tomorrow's Freddie Mac Survey Rate rate to be roughly unchanged, in the level of 5.95%.

The seasonally adjusted MBA Purchase Index dipped by 18.6% week-over-week. Citi analyzed the non-seasonally adjusted housing turnover rates based on the MBA Purchase Index. To estimate housing turnover rates, analysts scaled the MBA Purchase Index and lagged it by 30 business days. This showed that turnover rates will drop by about 5% in October from September. Citi attributed the expected decline to higher mortgage rates and believes that its impact will offset the effect of the higher business day count in October.

Meanwhile, the share of refinancings dropped to 53.9% from 55.0% from the prior week. The share of ARM applications increased to 25.2% from 22.7% a week ago. This increase is probably a response to rising mortgage rates, said Citi.

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