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