Mortgage applications drop as loan rates rise

By Julie Haviv

NEW YORK (Reuters) - U.S. mortgage applications fell last week, reflecting a drop in demand for home refinancing loans as interest rates soared to their highest levels since June, data from an industry group showed on Wednesday.

Applications for loans to buy homes, an early indicator of sales, rose slightly. Tepid interest in purchase loans does not bode well for the hard-hit U.S. housing market, which has been showing signs of stabilization.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended August 7 decreased 3.5 percent to 499.0.

Celia Chen, senior director of housing economics at Moody's Economy.com in West Chester, Pennsylvania, said higher interest rates on mortgages tend to depress home buying, but that demand is not as sensitive to changes in rates as it is in refinancing activity.

"Even though mortgage rates are rising, they still remain quite affordable," she said.

"The bigger obstacle to home buying is job losses and tight qualifying conditions for borrowing," she said.

With the U.S. unemployment rate at 9.4 percent, many potential home buyers who have lost or who fear they may lose their jobs remain sidelined even though home affordability has improved significantly.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.38 percent, up 0.21 percentage point from the previous week. It was the highest rate since the week ended June 19 and significantly above the all-time low of 4.61 percent set in the week ended March 27. The survey has been conducted weekly since 1990.

Interest rates a year ago were at 6.57 percent.

Mortgage rates were above 5 percent for an 11th straight week. Some experts say rates at 5 percent and below are needed to make a significant impact on home loan demand.

The MBA's seasonally adjusted purchase index rose 1.1 percent to 267.2, the third, albeit small, gain in the last four weeks.

The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was down 0.7 percent.

LOOMING FORECLOSURES TO PRESSURE HOME PRICES

Chen said the biggest obstacle for the U.S. housing market is foreclosures.

Moody's Economy.com is expecting 3.85 million defaults this year compared to 2.7 million last year, she said. First mortgage defaults are the first step in the foreclosure process; not all defaults turn into foreclosures.