Mortgage rates near record low keep demand at 5-year high

NEW YORK (Reuters) — Demand for mortgage applications was unchanged during the Christmas holiday week, holding at the highest levels in more than five years with loan rates near record lows, an industry group said Wednesday.

Borrowing costs have tumbled more than 1-1/2 percentage points from summer peaks and are widely expected to slide further as the government steps in to stabilize the worst housing market since the Great Depression.

Fixed 30-year home loan rates averaged 5.03% last week, marginally lower than 5.04% a week earlier but well below the 6.59% summer peak in July, according to the Mortgage Bankers Association's survey of mortgage applications.

Last week's rate was the lowest since June 2003, the trade group said.

Another survey released Wednesday by Freddie Mac confirmed that rates are falling to record lows.

Interest rates on the 30-year fixed-rate mortgage averaged 5.10% for the week ending Dec. 31, down from the previous week's 5.14%, according to a survey of 125 lenders nationwide.

The 30-year fixed-rate mortgage has not been lower since Freddie Mac started the Primary Mortgage Market Survey in 1971.

"Interest rates for 30-year fixed-rate mortgages fell for the ninth straight week and represented a third consecutive all time record low since Freddie Mac's survey began in April 1971," Frank Nothaft, Freddie Mac vice president and chief economist, said in a statement.

The Mortgage Bankers Association's seasonally adjusted index of mortgage application activity was unchanged last week at 1,245.7, matching the highest level since July 2003 set the previous week.

Requests for home purchase applications climbed 1.4% to 320.9 on a seasonally adjusted basis, while refinancing application demand slipped 0.4% to 6,733.8 last week.

The refinancing index had surged by nearly 63% in the prior week, also to the highest level since July 2003.

Fast-falling mortgage rates are driving demand, particularly for refinancing.

The Federal Reserve's plan, announced in November, to buy up to $500 billion of mortgage-backed securities and its pledge this month to expand those purchases if needed to lower mortgage rates, has already cut borrowing costs.

On Tuesday, the Fed said it would start buying in January and purchase up to a half trillion dollars of mortgage bonds within six months.

Affordability is improving by other measures as well, with a record annual drop in October bringing home prices down more than 23% from their summer 2006 highs, according to Standard & Poor's/Case-Shiller home price measures reported on Tuesday.

Consumer confidence, meantime, plunged to a record low in December in response to the worst job market in 16 years.

Consumers are reluctant to boost spending when unemployment is spiking and when they could be committing money to a house that could cost much less later, analysts said.

Home owners who want to refinance would be unable to if the value of their home has fallen below the size of their mortgage.

More rigid lending criteria also mean that many mortgage applications may not be approved.

While mortgage bond purchases by the government press home loan rates down, "the one thing the Fed and the Treasury cannot do is improve the credit quality of the borrower," said Kevin Cavin, mortgage strategist at FTN Financial in Chicago.

The government interventions "can drive down primary mortgage rates and make getting loans much more affordable, make a borrower's monthly payments lower — if they can qualify," he said on Tuesday. (Editing by Leslie Adler)

it helps to have sliding borrowing cost during these tough times.

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