U.S. mortgage applications sink as loan rates rise

By Lynn Adler

NEW YORK (Reuters) - The highest home loan rates in more than two months drained demand for refinancing last week, dragging total U.S. mortgage applications to the lowest level since early March, the Mortgage Bankers Association said on Wednesday.

Refinancing has been the lifeblood of a renewed push for mortgage funding much of this year, and even that has lost steam despite borrowing costs staying relatively low, according to the industry group's data.

The average 30-year mortgage rate rose 0.12 percentage point to 4.81 percent, above a low of 4.61 percent two months ago though down more than a percentage point from a year ago.

Many homeowners are waiting for kinks to be worked out of refinance programs from the government as well as government-controlled Fannie Mae (FNM.N) and Freddie Mac (FRE.N).

The hope is that once the hurdles in the refinance process are surmounted, consumers can return to slicing monthly housing costs and stimulating the recessionary economy by spending some of those savings.

Total U.S. mortgage applications fell 14.2 percent in the week ended May 22 to 786.0 on a seasonally adjusted basis, 37 percent below its recent peak of 1,250.6 in early April.

Many consumers are holding out for even lower rates and prices. Caution about making such a big purchase if jobs are at risk has also kept many buyers sidelined.

"People are calling but not necessarily willing to act," said Brad Sherman, vice president of residential lending at Nationwide Mortgage Services in Rockville, Maryland. "We keep hearing stories that housing prices are continuing to fall and people are nervous to commit new money" to buy when it could soon cost less.

The Mortgage Bankers Association's measure of demand for loans to buy homes rose by 1 percent to 256.6 last week, but has shown scant momentum during the keenly watched spring sales season.

In the meantime, those waiting for lower rates likely also saw home values slide versus the size of their loan, possibly to levels that kept lenders from approving a refinancing.

"As far as refinancing goes, people are counting on some of these Fannie Mae and Freddie Mac programs to fully kick in, and there are some problems with them that they haven't yet ironed out," Sherman said.

Requests for loans to refinance slumped 18.9 percent last week to 3,890.4, about 43 percent below the 6,813.5 peak in early April. Refinancings accounted for just over 69 percent of all applications, after hovering closer to 75 percent in recent weeks.

Affordability remains at record highs, but some key obstacles remain before the housing crisis becomes history.

Fixed mortgage rates still remain near record lows. The average home price nationwide has been slashed by more than 32 percent from the 2006 highs, according to the Standard & Poor's/Case-Shiller indexes.

The market may be on the doorstep of stabilization, according to some housing analysts, but a recovery won't be forthcoming with unemployment rising and foreclosures still setting records.