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Mortgage volume tanks; Jamie Dimon bashes the FHA

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Mortgage rates are barely moving, but demand among mortgage-dependent home buyers is weakening, data show.

Total mortgage application volume fell 3.6 percent on-week for the week ending July 11th on a seasonally adjusted basis, according to the Mortgage Bankers Association (MBA).

Read MoreHigher mortgage rates not deterring buyers

Applications to refinance were down 0.1 percent on week, while applications for home purchase loans dropped 8 percent to their lowest level since February 2014. Purchase applications are now 17 percent lower than the same week one year ago.

"The housing sector has shown little recent progress," noted Federal Reserve Chair Janet Yellen in a semi-annual report to Congress Tuesday. "While this sector has recovered notably from its earlier trough, housing activity leveled off in the wake of last year's increase in mortgage rates, and readings this year have, overall, continued to be disappointing."

Read MoreCitigroup to pay $7B to settle probe into subprime mortgages

Mortgage rates jumped in June of 2013 but have barely moved since, hovering in a narrow range. Last week the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 4.33 percent from 4.32 percent.

"None of the recent movement in mortgage rates could be considered 'fast-paced,'"noted Matthew Graham of Mortgage News Daily.

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One major area of weakness in the mortgage market today is loans backed by the Federal Government, with application volume down nearly 37 percent from a year ago, according to the MBA. The Federal Housing Administration (FHA), which insures but does not originate home loans, is largely to blame for that. It has raised insurance premiums and gone after the big banks aggressively for making bad loans.

"The real question for me is should we be in the FHA business at all," said Jamie Dimon, CEO of JPMorgan Chase, on a conference call Tuesday related to the bank's second-quarter earnings. "We want to help there, but we can't do it at great risk to JPMorgan."

Read More JPMorgan beats Wall Street, sees trading drop

JPMorgan has agreed to pay over $600 million to the FHA and the Department of Veterans Affairs for defective loans. It originated far fewer FHA loans in the second quarter of this year.

"Until they come up with a safe harbor or something, we are going to be very, very cautious in that line of business," said Dimon, adding that he was "confused" by how the FHA treated his bank.

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

Questions? Comments? Facebook.com/DianaOlickCNBC

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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.