Weekly mortgage applications drop after tiny rise in rates

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It didn't take much to throw a wet towel on the recent heat in mortgage applications.

Total volume dropped 3.2 percent for the week ending January 23 on a seasonally adjusted basis, according to the Mortgage Bankers Association (MBA). The results include an adjustment for the Martin Luther King holiday as well. After huge gains at the beginning of this month, mortgage applications are still up a striking 36 percent from a year ago.

"A 3.2 percent weekly decrease, after the two gigantic previous increases, leaves the index in stellar territory. After the past two weeks, I celebrate down 3.2 percent," said Matthew Graham of Mortgage News Daily.

The fall in application volume from the previous week was largely due to a slight uptick in mortgage rates. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 3.83 percent from 3.80 percent, with points decreasing to 0.26 from 0.29 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans, according to the MBA.

A steep drop in rates since the start of the year pushed refinance applications higher, but even that small rate drop was enough to cool refinances last week by five percent. For loans backed by the government, however, refinances gained.

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"We are closely watching for the impact of the FHA mortgage insurance premium decrease. This week, it showed up in the refinance numbers," said Michael Fratantoni, chief economist for the MBA. The FHA share of total applications increased to 9.1 percent this week from 8 percent last week.

"Conventional refinances were down on the week by comparison," added Fratantoni.

Mortgage applications to purchase a home, which are affected less by rates, were essentially flat from the previous week, falling 0.1 percent, and are just one percent higher than the same week one year ago. Sales of both existing and newly built homes improved in December, according to the National Association of Realtors and the U.S. Census, and some real estate agents this month say they are seeing improved buyer traffic. That could bode well for purchase applications in the coming weeks, as buyers need to find a home before obtaining financing.