After interest rates briefly spiked two weeks ago, mortgage bankers found they had sold more loans on the secondary market than they actually wound up closing, Wall Street analysts said.

"Mortgage bankers overestimated how many loans would be closed," said Inna Koren, first vice president at Prudential Securities.

These lenders sell loans to the secondary market based on applications. But many applicants whose rates are not locked in do not close their loans when rates rise.

"Some lenders got caught when rates turned very abruptly," said David Lereah, chief economist for the Mortgage Bankers Association. "When rates go up, they lose because the price goes down."

To be sure, the rate episode was short-lived. Interest rates started declining again last Thursday after the Federal Reserve trimmed two key interest rates by 25 basis points. "Mortgage rates are tumbling," said Mr. Lereah, and he estimated that the average rate on a 30-year mortgage would return to 6.5%, down from Thursday's level of 6.9% as reported in Freddie Mac's rate survey.

Nevertheless, mortgage bankers did a lot of buying on Wall Street last week to meet their obligation to deliver the loans they had sold.

Mortgage bankers are in the marketplace on a "forward basis, selling loans so that we minimize interest rate risk," said Patrick S. Flood, president of Homebanc Mortgage Corp. in Atlanta. Lenders try to predict the movement from applications to closings, he said. These predictions are based on whether customers buy or refinance, whether they let the rate float or lock it in, and the direction of interest rates, he said.

Last Wednesday, the MBA reported that the seasonally adjusted refinancing index had soared to 4389.1, from 3410.5 the previous week, a 28.7% increase. But some analysts said they believe these numbers are misleading because they incorporate multiple applications by homeowners.

Mr. Lereah acknowledged that the index is "biased upward," though he asserted it is a "true index."

"I do believe that there must be a significant fallout rate from record applications," he added. "The effective number of applications that will actually go toward buying a house or refinancings will be less."

Mortgage bankers have been reporting that their fallout rate is larger than normal, Mr. Lereah said. The MBA plans to release data about fallout rates, he added, and it began collecting such information a few weeks ago.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.