UPDATE 1-US mortgage applications jump on refinancing -MBA

(Adds quotes, Commerce Department housing starts and permits data)

By Julie Haviv

NEW YORK, Sept 17 (Reuters) - U.S. mortgage applications surged to their highest level in four months in the latest week, fueled by soaring demand for home loan refinancing as interest rates plunged, an industry group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications USMGM=ECI, which includes both purchase and refinance loans, for the week ended Sept. 12 increased 33.4 percent to 661.7, the highest level since the week ended May 9.

Zach Pandl, economist at Lehman Brothers in New York, said the increase was directly tied to interest rates on mortgages.

"The MBA data no doubt reflects the sizable decline in mortgage rates that took place, so the surge in refinancing applications came as no surprise," he said.

"We were expecting borrowers to come out in droves, so they did not disappoint and further increases in refinancing applications are to be expected," he said.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.82 percent, down 0.24 percentage point from the previous week.

Interest rates were below year-ago levels of 6.29 percent.

"The drop in mortgage rates reflected the Treasury's announcement that Fannie Mae and Freddie Mae were placed under conservatorship of the Federal Housing Finance Agency," Orawin Velz, the MBA's associate vice president of economic forecasting, said in a statement.

"Renewed financial concerns should keep long-term Treasury yields low and translate to lower mortgage rates in the near term despite some widening in mortgage spreads," she said.

The MBA expects to see significant increases in mortgage demand in coming weeks on both the purchase and refinancing side, she said.

The MBA's robust report offers a glimmer of hope for the U.S. housing market, currently suffering the worst downturn since the Great Depression. Lower interest rates should help homeowners avoid foreclosures through home loan refinancing and entice potential home buyers.

The MBA's seasonally adjusted purchase index USMGPI=ECI rose 2.4 percent to 380.4. The index came in well below its year-ago level of 452.0, a drop of 15.8 percent.

Overall mortgage applications last week were 1.7 percent below their year-ago level. The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was up 13.5 percent to 508.2.

WEEKLY REFINANCING ACTIVITY SOARS

The group's seasonally adjusted index of refinancing applications USMGR=ECI soared 88.1 percent to 2,300.0. The index was up 17.2 percent from its year-ago level of 1,962.0.

It was the largest weekly rise in applications since the week ended Jan. 5, 2001 when it rose by 106.1 percent.

The refinance share of applications increased to 51.6 percent from 36.3 percent the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 4.0 percent, down from 6.4 percent the previous week.

Fixed 15-year mortgage rates averaged 5.54 percent, down from 5.73 percent the previous week. Rates on one-year ARMs decreased to 6.95 percent from 7.00 percent.

The MBA's report followed other robust data this week gauging home builder confidence.

U.S. home builder sentiment rose for the first time in seven months in September, inching off a record low, as falling mortgage rates and an array of factors buoyed confidence, the National Association of Home Builders said on Tuesday. The industry group's preliminary NAHB/Wells Fargo Housing Market Index rose 2 points to 18, rising from 16 in the previous two months. The gauge started in January 1985.

Home builders, however, have significantly pared back activity.

The Commerce Department said on Wednesday construction starts on new U.S. homes plummeted to a 17-1/2-year low during August as builders scaled back sharply. Starts on new homes fell 6.2 percent to a seasonally adjusted annual rate of 895,000, their lowest since January 1991. New applications for building permits declined 8.9 percent in August to an annual rate of 854,000. It was the weakest rate for permits since February 1991.

While U.S. housing market indexes tend to be volatile, data from the MBA may help gauge how the hard-hit sector is faring. (Additional Reporting by Glenn Somerville; Editing by Diane Craft)