Things certainly aren't getting much easier for prepayment researchers on Wall Street and at various hedge funds and agency mortgage REITs this week, as data from two key application indexes again found mortgage applications heading in opposite directions. Well-publicized application data from the Mortgage Bankers Association on Wednesday morning suggested that mortgage applications increased 7.5 percent to 513.4 for the holiday-shortened week ended July 4, although applications remained off 18.1 percent from year-ago levels. The MBA application index is calibrated to March 16, 1990; a reading of 513.4 means that application activity was roughly five times greater than when the index was first established. Which means loan demand is set to increase, right? Not so fast. A separate index maintained by Mortgage Maxx LLC, a company that provides prepayment data to Wall Street researchers, reached a much different conclusion earlier in the week: the company's Max index found that applications actually fell slightly, off 0.2 percent from the week before. This marks the second week in a row that the two indexes have yielded opposite results, with the MBA suggesting an increase in applications and the Max suggesting a decrease. Last week, the MBA reported a 3.6 jump in application activity, while the Max reported a 5.4 percent drop. Troubled borrowers, multiple applications Sources suggested to HW Wednesday morning that the difference between the two indexes clearly underscores just how many troubled borrowers are likely searching for loans, and how borrowers looking to purchase a home are having to shop around -- and said that neither index was incorrect per se, just that each was measuring different aspects of mortgage application activity. "The MBA index gives us overall applications, which may or may not translate into demand," said one source, an ABS analyst that asked not to be named. "The reason is simple: when you control for the applicant's address, we're seeing a very different picture that's more in line with the Max." The Max index, while not as geographically diverse as its MBA counterpart, corrects for multiple application activity. Which means that those looking to the MBA data as proof that borrowers are jumping back into mortgages may be jumping to a wrong conclusion; prepayment researchers learned to use the Max for their prepayment modeling during the housing boom, as the MBA data often led to inflated estimates of loan demand. The same problems that limited the MBA data during the housing boom -- let's call it the "Lending Tree effect" -- now appear to be an issue as the housing mess wears on as well, with mortgage availability constricted and borrowers applying and re-applying to not only get the best rate, but perhaps to even qualify at all. That's not to say the MBA data is incorrect, by the way. It's accurate for what it measures; but it's clear at this point that using MBA application data to extrapolate forward demand for mortgages -- and by extension housing -- is likely to lead to conclusions that may be too optimistic. For more information, visit Side notes: The MBA said FHA application activity jumped a whopping 19.8 percent last week, one of the largest single-week jumps observed this year ... interest rates appear to have risen slightly, up 10 basis points for a 30-year fixed rate mortgage, according to the MBA preliminary data. Formal rate studies from Freddie Mac and Bankrate are set to be released tomorrow ... Mortgage Maxx CEO Paul Descloux said that applications are likely to tank the rest of 2008, as "current refi disincentives remain" in place and an "inexorable deceleration of seasonal housing sales will commence" after July and August.