Mortgage applications near 4-year high

A foreclosed house for sale is pictured in the Green Valley Ranch development in Denver, Colorado July 26, 2007.

NEW YORK (Reuters) - Applications for home mortgages jumped to their highest in nearly four years as low interest rates led more homeowners to seek refinancing, according to data from an industry group on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity rose 7.5 percent to 1,054.9 in the week ended January 25. It was last higher in late March 2004, the MBA said.

The MBA seasonally adjusted index of refinancing applications soared 22.1 percent to 5,103.6, the highest since July 2003. But the index measuring applications for home purchases declined 17.7 percent to 362.0, the MBA said.

Mortgage rates at their lowest in more than two years have begun stirring homeowners that hunkered down after seeing home prices drop and mortgage lenders post big losses on bad loans, brokers said. A federal stimulus plan that would make jumbo mortgages more attractive to investors has also led homeowners in high-cost regions to seek lower rates, they said.

The so-called conforming loan limit that caps the size of loans eligible for purchase by government-sponsored enterprises Fannie Mae and Freddie Mac would rise as high as $729,750 under the stimulus plan from $417,000 today. Lenders expect a boom in refinancing in high-cost areas like New York and California should the plan become law.

With efforts "to increase loan limits in addition to Federal Reserve rate cuts, refinancing is really gaining momentum," said Nicholas Bratsafolis, chief executive officer at Refinance.com.

Refinancing activity rose to 73 percent of all applications, up from 66 percent in the previous week, the MBA said. The jump came after the Fed lowered its target short-term interest rate in an emergency move aimed at stemming economic weakness and easing tight credit conditions.

Fixed 30-year mortgage rates rose 0.11 percentage point last week to 5.6 percent, the MBA said. The previous week's rate was the lowest since late June 2005.

The Fed is expected to lower its overnight federal funds target again on Wednesday.

Lowering the short-term rate may not mean further declines in fixed-mortgage rates, which more closely follow yields on the Treasury 10-year note. But the visibility of Fed cuts and mortgage help in the federal plan will likely keep homeowner inquiries up, said Bob Moulton, president of Americana Mortgage Group in Manhasset, New York.

"There's a band of homeowners that are going to jump in and refinance if they have equity" in their home, Moulton said. Last week was one of his busiest in three years, he added.

Rate cuts can also reduce the amount that interest rates can rise on adjustable mortgages for homeowners that can't qualify for refinancing. Payments on $535 billion in mortgages are slated to reset this year, fueling expectations that the "payment shock" will boost already high delinquencies and foreclosures that are damping demand.

A further 1 percentage point cut in the 3.5 percent fed funds rate could erase the shock in subprime ARMs, according to analysts at Bank of America.

(Additional reporting by Lynn Adler; Editing by Andrea Ricci)