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Mortgage applications plummet amid uncertainty

Mortgage applications fell 5.5 percent in the past week, to the lowest level in more than 12 years, according to a weekly report from the Mortgage Bankers Association released Wednesday.

The plunge follows a slight increase in interest rates. Refinance and home purchase applications dropped 4 percent and 6 percent, respectively, as investors wait for word from the Federal Reserve on whether it will reduce its bond-buying activity.

"It is a discordant note compared to the more positive data we are seeing in other parts of the economy, including the job market reports and industrial production," said Michael Fratantoni, the association's vice president of research and economics. "Credit tightening could be part of it, rates another part."

(Read more: The healthiest housing markets? It'll surprise you)

The average contract interest rate for 30-year fixed mortgages with conforming loan balances ($417,000 or less) rose to 4.62 percent from 4.61 percent, a small move but the highest level since September. The average rate for a five-year adjustable rate mortgage jumped to 3.20 percent from 3.11 percent. More borrowers have been heading to ARMs lately, seeking lower rates amid rising housing prices.

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Total mortgage applications are down 56 percent from a year ago, with the plunge in refinances leading the way. Purchase applications though are down 10 percent, mirroring a slowdown in home sales in many previously hot markets.

California Realtors reported Tuesday that November sales fell 15 percent in Los Angeles and 13 percent in San Francisco year over year.

With credit still tight, and Fannie Mae and Freddie Mac announcing fee hikes, fewer borrowers can afford a home loan.

(Read more: Homes get makeovers as mortgages are back in black)

Compounding this, the government's mortgage insurer, the Federal Housing Administration, has lowered loan limits in hundreds of local markets starting in 2014. That will make thousands of potential borrowers ineligible.

The share of all-cash buyers remains high, accounting for more than one-third of home sales in October, according to the National Association of Realtors.

By CNBC's Diana Olick. Follow her on Twitter @Diana_Olick.

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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