NEW YORK (TheStreet) -- Mortgage applications declined 6.3% in the week ended Dec. 20 from one week earlier, following the Federal Reserve's announcement that it would begin a modest reduction of bond purchases.

The Mortgage Bankers Association's (MBA) Market Composite Index declined 7% on an unadjusted basis. The refinance component of the index dropped 8% from the previous week, to its lowest level since November 2008.

While refinances have been steadily declining since May, purchase volume has also started to weaken in recent weeks. The seasonally adjusted purchase index decreased 4% from a week earlier. Unadjusted, the index decreased 5% and is down 11% from a year earlier.

Mike Frantotoni, vice president of Research and Economics at the MBA noted that government purchase applications were sharply lower, down 25% year-over-year. He attributed the decline to the rise in premiums for mortgages backed by the Federal Housing Administration.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 4.64%, the highest level since September 2013, from 4.62%.

The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,000) increased to 4.63% from 4.61%.

The slightly lower rate for jumbo loans has been an anomaly in this market. Private capital has been willing to finance high-quality jumbo borrowers at rates lower than Fannie Mae and Freddie Mac.

The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA increased to 4.29% from 4.25%.

All rates are for loans with at least a 20% downpayment.

-- Written by Shanthi Bharatwaj in New York

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