UPDATE 1-US home loan demand dives to '08 low as rates soar

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By Julie Haviv

NEW YORK, April 23 (Reuters) - U.S. mortgage applications plunged last week as surging interest rates slashed demand for home loans to the lowest level this year, industry group data showed on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended April 18 fell 14.2 percent to 637.6.

Bob Walters, chief economist at Quicken Loans, an online mortgage lender in Livonia, Michigan, said the widespread tightening of lending standards played a large role because it is constraining many consumers.

"Last week's numbers are indicative of the current state of the credit markets," he said. "Credit continues to tighten, slamming the door shut on many worthy borrowers."

The U.S. housing market is suffering one of the worst downturns in its history. Last week's drop in demand may indicate what is in store for the hard-hit sector this spring, which traditionally is the peak of the home-buying season.

Overall mortgage applications last week were 2.4 percent below their year-ago level. The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was down 10.5 percent to 698.7.

HIGHER INTEREST RATES

Sharply higher interest rates played a large role last week, according to Michelle Meyer, an economist at Lehman Brothers in New York.

"Higher mortgage rates not only make refinancing less attractive for many borrowers, but if sustained, discourage new purchases," she said in commentary published Wednesday.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.04 percent, up 0.30 percentage point from the previous week, the largest jump in interest rates in a month and a half.

Interest rates were below year-ago levels of 6.13 percent.

Fixed 15-year mortgage rates averaged 5.60 percent, up from 5.27 percent the previous week. Rates on one-year adjustable-rate mortgages (ARMs) decreased to 6.93 percent from 7.02 percent.

The MBA's seasonally adjusted purchase index dropped 6.4 percent to 357.3, its second lowest level of the year. The index came in below its year-earlier level of 411.0, a drop of 13.1 percent.

REFINANCING ALSO HITS 2008 LOW