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Home Loan Demand Plummets as Refinancing Dives

U.S. mortgage applications plummeted last week to the lowest in nearly five months, as home refinancing loan demand plunged amid climbing interest rates, an industry trade group said.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and purchasing loans, for the week ended December 22 decreased 14.2% to 555.8, its lowest level since early August. The index stood at 647.6 in the previous week.

Michelle Meyer, economist at Lehman Brothers in New York, said the indexes are volatile on a weekly basis but the monthly averages show a stabilization in the volume of applications.

"If you look at a monthly average, the purchase and the refinancing index have been stabilizing over the past few months," she said. "December started off very strong, so on the month it was still fairly positive the MBA applications."

Meyer said the data is consistent with the company's outlook for a leveling off in sales of homes.

The MBA said the four-week average of mortgage applications is down 1.7%.

INTEREST RATES CLIMB

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.12%, up 0.02 percentage point from the previous week, in the third straight weekly climb.

Three weeks prior, 30-year mortgage rates sank to 5.98%, the lowest level since October 2005.

Demand for home purchase loans also weakened as the MBA's seasonally adjusted purchase index, widely considered a timely gauge of U.S. home sales, fell 10.6% to 390.2, its lowest since late October. The index was also below its year-ago level of 432.9.

REFINANCING PLUMMETS

Also driving demand lower last week was a 18.5 % fall in the MBA's seasonally adjusted index of refinancing applications to 1,604.6, its lowest since early September. A year earlier the index stood at 1,259.1.

"You really don't want to look too much into the weekly numbers because it's so volatile, and especially the last two weeks in December, in general, you see strange seasonal volatility," said Meyer. "So when you look at the monthly average you get a much clearer picture and it does show stabilization in applications."

The refinance share of applications decreased to 48.8% from 50.8 the previous week.

In the past, adjustable-rate mortgages, known as ARMs, have been a refuge for cash-strapped consumers seeking to buy a home with low initial mortgage payments. But the borrowing costs for some fixed-rate loans were lower than some floating-rate loan types.

Fixed 15-year mortgage rates averaged 5.84%, up from 5.82%. Rates on one-year adjustable-rate mortgages (ARMs) increased to 5.87% from 5.82%.

The ARM share of activity decreased to 23.1% of total applications from 23.6% the previous week, its lowest since October 2003.

U.S. housing industry indexes, in general, tend to be volatile and in recent months they have painted a mixed picture, with some pointing to weakening and others to stabilization.

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

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