January 28, 2009 / 4:24 PM / 12 years ago

UPDATE 1-U.S. mortgage applications plunged last week -MBA

(Adds economist comment)

By Al Yoon

NEW YORK, Jan 28 (Reuters) - Applications for U.S. home mortgages cratered last week to levels not seen since November as rates held stubbornly above record lows engineered by the Federal Reserve earlier this month, according to data from an industry group on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity plunged by 38.8 percent to 732.1 in the week ended Jan. 23. It was 37.1 percent higher than a year earlier.

Fixed 30-year mortgage rates averaged 5.22 percent in the week, down from 5.24 percent the prior week and up from 4.89 percent in early January, the MBA said.

Rising U.S. government borrowing to pay for financial bailouts and expected stimulus to stave off recession have begun to push up Treasury yields, offsetting Fed efforts to drive mortgage rates lower, analysts said. Benchmark 10-year Treasury yields, which help govern mortgage rates, have climbed nearly a half-percentage point since late December to 2.53 percent. For analysis: see [nN27450935].

The Fed’s efforts to lower rates are still seen as a success, despite the setback in Treasury yields, said James O’Sullivan, an economist at UBS Securities in Stamford, Connecticut. The Fed will also likely reiterate the central bank’s focus on rates after its policy meeting ends on Wednesday, he said.

The possibility that the Fed will purchase long-term Treasuries could counter the recent rate uptick, he said. What’s more, Treasury yields probably can’t extend their rise much with the economy mired in recession, he said.

“One way or another, the goal of the Fed and Obama administration will be to drive mortgage rates down further,” he said. “What that entails could be Fed buying Treasuries, or stepping up its (mortgage) purchase plan even more.”

The Fed’s plans to lower home borrowing rates this year with purchases of up to $600 billion in mortgage-related securities had resulted in a spike in applications, mostly for homeowners seeking to refinance loans. Lower rates boosted affordability on homes, whose prices nationally have fallen more than 25 percent, to 2004 levels, according to Standard & Poor’s/Case-Shiller indexes.

The National Association of Realtors on Monday said existing home sales rose 6.5 percent in December after prices dropped 15.3 percent from a year earlier. That report suggested sales have bottomed, according to Moody’s Economy.com.

But skeptics assert that tight lending conditions and lower-than-expected appraisals will limit loan approvals. Higher rates would also cut savings via refinancings, a source of cash that could be recycled into the economy.

The MBA’s index of refinancing applications plummeted 48 percent to 3,373.9 last week. The gauge of loan requests for home purchases declined 2.9 percent to 294.3.

Additional reporting by Julie Haviv, Editing by Chizu Nomiyama

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