Home loan demand up as rates tumble

NEW YORK (Reuters) - Mortgage applications rose for a second straight week as interest rates sank to their lowest since May, data from an industry trade group showed on Wednesday.

Market analysts, however, say data on mortgage applications may be artificially inflated because prospective borrowers have been filing multiple applications to obtain a single loan due to widespread tightening of lending standards resulting from a sharp rise in defaults in the subprime mortgage market, which caters to borrowers with poor credit histories.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application, which includes both purchase and refinance loans, rose 5.5 percent for the week ended September 7.

Applications were 12.5 percent above their year-ago level. But the four-week moving average of mortgage applications, which smoothes the volatile weekly figures, was down 0.8 percent to 634.2.

Jim Svinth, chief economist at LendingTree.com, an online company that matches consumers with lenders, said lower interest rates made borrowers evaluate their mortgages and options after the Labor Day holiday.

"With today's low interest rates, prime borrowers are realizing they are in the driver's seat and can take action on finding great home loans that match their needs," he said. "With the Fed meeting next week, I feel we'll continue to see more of this type of activity as all signs are pointing to a rate drop on Tuesday."

"We'll have to wait and see if these predictions indeed come true," said Svinth, who is based in Irvine, California.

But market analysts also say the MBA's data may be overstating activity since it includes only retail lenders, which possibly may be experiencing an increase in applications as wholesale lenders pull back from the market right now.

The MBA's data does not cover mortgage brokers, major participants in the loan origination market.

More Americans had their home loan applications turned down in 2006 than a year earlier, although the majority continued to be approved, according to a report issued on Wednesday by financial sector regulators.

"Overall, the denial rate for all home loans in 2006 was 29 percent, compared with 27 percent in 2005," a Federal Financial Institutions Examination Council (FFIEC) report said.

RATES PLUNGE

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.25 percent, down 0.17 percentage point from the previous week, their lowest since the week ended May 18 when they stood at 6.23 percent. Interest rates were also below year-ago levels at 6.32 percent.

Yields on 10-year U.S. Treasury notes, which are linked to mortgage rates, fell last week for a fourth straight week to a 19-month low as investors grew more confident the Federal Reserve will cut benchmark rates at its policy-making meeting on September 18. Yields move inversely to price.

The MBA's seasonally adjusted purchase index rose 5.2 percent to 448.0. The index was 9.2 percent above its year-earlier level.

REFINANCINGS SHARE UP

The group's seasonally adjusted index of refinancing applications rose to 1,876.6, 6 percent above the prior week. The index was up 17.5 percent from a year earlier.

The refinance share of applications increased to 42.1 percent from 41.4 percent the previous week.

Last week, fixed 15-year mortgage rates averaged 5.90 percent, falling 0.2 percentage point from 6.10 percent.

Rates on one-year adjustable-rate mortgages (ARMs) decreased to 6.34 percent from 6.52 percent. Rates on ARMs fell for the first time in five weeks.

The ARM share of activity increased to 13.2 percent, up from 12.6 percent the previous week.

Demand for ARMs, however, has mostly been trending lower as its interest rate advantage over fixed-rate mortgages diminished.

Recent U.S. housing industry indexes, while volatile, generally point to a weak outlook for the industry, suggesting a delayed recovery for the hard-hit sector.

The MBA's survey covers about 50 percent of all U.S. retail residential loans. Respondents include mortgage banks, commercial banks and thrifts.

(Additional Reporting by Glenn Somerville)