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Mortgage applications take a holiday as rates rise

Alberto Palmeres | E+ | Getty Images

It didn't take much for the mortgage market to plunge into a deep freeze.

As temperatures fell across the country last week, so did mortgage applications, down 12.8 percent from the week before, according to the Mortgage Bankers Association. That includes an adjustment for the Thanksgiving Day holiday, but the shortened week still played a role in the drop.

Applications to refinance fell the hardest, down 18 percent week-to-week, seasonally adjusted, to the lowest level since the first week of September. Applications to purchase a home fell 4 percent.

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"Essentially, the very short work week had a significant impact on the number of applications. Interest rates were up slightly and that pushed down on refinances, but we attribute the size of the drop mainly to the holiday," said MBA spokesman Shawn Ryan.

The average rate on the 30-year fixed "conforming" mortgage, backed by Fannie Mae or Freddie Mac, rose very slightly, from 4.48 percent to 4.51 percent. The average rate for a "jumbo" loan, generally those over $417,000, also rose slightly but is still below the conforming rate at 4.49 percent.

Jumbo loans historically carry higher rates, but high guarantee fees charged to lenders by Fannie Mae and Freddie Mac have been passed on to borrowers in the form of higher rates.

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The refinance share of mortgage applications fell to just 63 percent of total applications; refinances had accounted for well over 80 percent of all applications when rates were at record lows.

The drop in refinancing has hit the mortgage banking industry hard. Banks reported net earnings of $4.75 billion on mortgage banking activity in the third quarter, according to Inside Mortgage Finance. That was down 42 percent from the second quarter and was the lowest quarterly earnings for the industry since the second quarter of 2011. The drop in origination volume has forced many of the major banks to lay off workers, but they have not eased up on lending standards in a meaningful way.

While the holiday may have played a role in the weekly numbers, total mortgage applications are down dramatically from both a month and a year ago. This, as anywhere from one third to one half of all homes being purchased today are paid for in cash.

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