UPDATE 2-US mortgage applications down, refinancing demand slows

WASHINGTON, Oct 31 (Reuters) - Applications for U.S. home mortgages fell last week as demand for refinancing tumbled for the fourth week in a row, an industry group said on Wednesday, although other recent data has indicated the housing market is improving.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, was down 4.8 percent in the week ended Oct 26.

The MBA's seasonally adjusted index of refinancing applications dropped 6 percent, while the gauge of loan requests for home purchases, a leading indicator of home sales, edged up 0.5 percent.

The Federal Reserve last month helped spur mortgage activity when it announced a third round of so-called quantitative easing, or QE3, to aid the economy, driving down home loan rates and making it more attractive for borrowers to refinance.

The Fed announced open-ended purchases of $40 billion a month worth of mortgage-backed bonds until it saw a substantial improvement in the outlook for the U.S. labor market. The news spurred a jump in refinancing activity to a four-year high.

But home loan rates have bounced back up a bit since then, and the MBA saw that as the main reason refinancing activity slipped.

``Since (QE3) we have seen Treasury rates drift up about 15 or 20 basis points and mortgage rates follow them up, and that has been enough to lead to these four consecutive weeks of declines in refinance volumes,'' said Mike Fratantoni, MBA's vice president of research and economics.

MBA expects mortgage rates to keep drifting higher over the next year as the U.S. economy continues to recover, with refinancing applications likely heading lower as a result.

Another analyst noted that the mortgage applications numbers can be volatile and he did not think the decline of the last four weeks indicated a deterioration in the broader outlook for housing, which has brightened in recent months.

``Overall, the housing data has been favorable,'' said Daniel Silver at JPMorgan in New York. ``New home construction, new home sales - levels are still very weak, but you see growth rates picking up, and it is pretty clear that it is on an upward trend,'' he said.

The Mortgage Bankers Association said the refinance share of total mortgage activity slipped to 80 percent of applications from 81 percent.

Fixed 30-year mortgage rates averaged 3.65 percent in the week, up 2 basis points from 3.63 percent the week before.

The survey covers over 75 percent of U.S. retail residential mortgage applications, according to MBA.