A rebound in mortgage rates caused refinancing applications, as measured by the Mortgage Bankers Association's index, to fall 12% last week after surging by a quarter the week before, the trade group said Thursday.

Orawin Velz, the MBA's vice president of forecasting, said borrowers pulled back because the average 30-year fixed mortgage rate increased 35 basis points, to 5.24%. "Refinance activity is very sensitive to rates, and at 5% some borrowers are waiting," she said.

Lenders have been flooded with applications since late November, when the Federal Reserve Board announced a plan to drive down borrower rates by purchasing mortgage-backed securities. But tightened credit standards and limits on lender capacity continue to temper lending volumes.

Many lenders said they are rejecting more than half of all refinance applications because too many borrowers have impaired credit. Several lenders also said that requests for cash-out refis — the majority of which will never get approved — have accounted for 25% of recent applications.

This year will bring "the first significant refinancing wave in five years," said Derek Chen, an analyst at Barclays Capital. However, he said, the timing and scale will depend largely on whether the government takes additional steps to relax underwriting standards at Fannie Mae and Freddie Mac.

Allowing the government-sponsored enterprises to waive reappraisal requirements for streamlined refis "would essentially allow underwater borrowers the ability to refinance their loans … at nearly no cost to the GSEs and taxpayers" and "unleash a major refinancing wave," Mr. Chen said.

In a report published Thursday, a team of Barclays analysts including Mr. Chen and Nicholas Strand wrote that lenders are offering borrowers rates that are more than a point higher than current coupons for mortgage-backed securities. Hence "originators have room to offer better rates to borrowers as they ramp up capacity to meet demand, but have yet to do so."

Charles N. McQueen, the president of McQueen Financial Advisors, a Royal Oak, Mich., firm that performs mortgage servicing valuations, said a wide swath of borrowers — those with loan-to-value ratios of 80% or more, and most loans originated after 2002 — "will be very tough to refinance, because credit standards are much higher."

"With home values as beat-up as they are, we're seeing prepayments that are two-thirds to half of projections," Mr. McQueen said.

James Deitch, the chief executive of American Home Bank in Mountville, Pa., a division of First National Bank of Chester County, said many banks are averaging pull-through rates of 45%, compared with 75% during past periods of strong refinancings. "Most lenders are circumspect on pull-through rates and now borrowers have to jump through a lot of hurdles in terms of documenting their income," Mr. Deitch said.

One reason loans are falling through is that some borrowers have to pay down some principal in order to refinance if their loan-to-value ratio is too high, he said.

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