Lower US mortgage rates lift applications demand

(Corrects date)

By Lynn Adler

NEW YORK, Nov 26 (Reuters) - Lower U.S. mortgage rates lifted demand for mortgage applications last week, a trade group said on Wednesday, and demand should escalate after a new broad-brushed government plan to support the housing markets.

With average 30-year fixed loan rates dropping 0.17 percentage point to 5.99 percent last week, total mortgage applications rose 1.5 percent mainly due to demand for mortgages to buy houses, according to the Mortgage Bankers Association's seasonally adjusted index.

On Tuesday, the Federal Reserve and Treasury unveiled a plan to buy up to $500 billion of mortgage securities backed by Fannie Mae, Freddie Mac and Ginnie Mae, as well as up to $100 billion of debt issued by Fannie, Freddie and the Federal Home Loan Banks.

This massive infusion is expected ultimately to reduce U.S. mortgages rates further, as they have been hovering at high levels over risk-free government debt.

Average 30-year home loan rates fell to 5-1/2 percent on Tuesday after the government lifeline was announced, according to Bankrate, Inc.

Lower loan rates should help revive the worst U.S. housing market since the Great Depression. Refinancing should also increase, freeing cash for consumers to spend and bolster an economy widely seen deeply in recession.

"Over time, bringing those mortgage rates down and keeping them down is a step necessary to begin soaking up the inventory of unsold homes in the marketplace," Greg McBride, senior financial analyst at Bankrate in North Palm Beach, Florida, said on Tuesday.

"Prices have been coming down but mortgage rates really haven't," he added. "Well now, you've got both oars rowing in the same direction for you as a home buyer. This, over time, is going to get people back in the market, get people a little more willing to take the plunge into home ownership."

The Mortgage Bankers Association's index of applications for loans to buy homes rose 5.3 percent last week to 261.6. Its gauge of refinancing applications declined 2.1 percent to 1,254.0 last week.

Total mortgage applications are climbing from eight-year lows set earlier this month.

But while lower mortgage rates may spark buying and refinancing demand, roadblocks remain to prevent any quick turnaround in housing, said Mike Schenk, senior economist for the Credit Union National Assocation in Madison, Wisconsin.

"It will decrease the amount of time it takes to get this thing fixed. But that doesn't mean it's going to magically transform it into a one- or two-year adjustment," he said on Tuesday.

With unemployment, now at a 14-year high 6.5 percent, likely to rise above 8 percent next year, and many buyers unwilling to purchase a depreciating asset, fence-sitting will persist, he said.

The 20-city September home price index from Standard & Poor's/Case-Shiller on Tuesday tumbled 21.8 percent from its summer 2006 peak.

Falling home prices, eroding income and stock wealth "make it much less likely that people will make big bets, like a bet on the housing market, to make this really big lifetime decision at a point when it looks like the economy is getting weaker and weaker," Schenk said.