U.S. home refinancing demand at highest in 15 months

NEW YORK (Reuters) - U.S. mortgage applications leaped last week as rock-bottom interest rates lifted demand for home refinancing to its highest level in 15 months, a development that could portend stronger economic growth.

Home loan refinancing puts extra cash into consumers' hands that can be used to pay off existing debt or funnel money into the economy through extra spending.

By lowering a monthly mortgage payment it may also help some homeowners avoid default and foreclosure if their credit is good enough.

The Mortgage Bankers Association said on Wednesday its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended Aug. 13, increased 13.0 percent. The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was up 2.6 percent.

The MBA's seasonally adjusted index of refinancing applications increased 17.1 percent, the biggest jump since the week ended May 15, 2009.

"Refinancing will help free up cash for homeowners that would have otherwise been tied into their home and this cash could help support consumer spending, and therefore GDP, albeit only modestly," said Michelle Meyer, senior U.S. economist at BofA Merrill Lynch in New York.

With investors worrying about deflation and a double-dip recession, the first revision to second quarter GDP data, due Friday, August 27, will be closely watched. Bank of America Merrill Lynch forecasts a downward revision to 1.5 percent.

One sign that consumers may already be opening their wallets emerged on Wednesday when one of the largest U.S. retailers, Target Corp, on Wednesday, when it posted higher quarterly earnings.

For a graphic on mortgage applications, click link.reuters.com/vaz55n

MORTGAGE RATES STILL NEAR HISTORIC LOWS

The MBA said borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.60 percent, up 0.03 percentage point from the previous week's record low. The survey has been conducted weekly since 1990. Mortgage rates were also below their year-ago level of 5.15 percent.

Fixed 15-year mortgage rates averaged 3.99 percent, up from the previous week's record low of 3.95 percent. Rates on one-year adjustable-rate mortgage, or ARMs, decreased to 6.90 percent from 7.00 percent.

But homeowners in Florida, and other hard-hit housing markets, are finding it difficult to refinance because appraisals of home values are coming in significantly below the amount owing on outstanding mortgage balances, according to Thomas Meyer, CEO of J.I. Kislak Mortgage in Miami Lakes, Florida, said

The housing market has been struggling since the April 30 expiration of popular home buyer tax credits. The Commerce Department on Tuesday said U.S. housing starts rose but to a much weaker rate than expected in July, while permits for future home construction fell to their lowest level in more than a year.

To take advantage of the tax credits, buyers had to sign purchase contracts by April 30. Contracts originally had to close by June 30, but that was extended by three months.

"There is a feeling that we are at, or very close to, the bottom in the fall of housing prices and that now is the time to buy," said Thomas Meyer, chief executive of J.I. Kislak Mortgage in Miami Lakes, Florida.

But low rates failed to foster demand for loans to purchase a home last week, with demand sliding for the first time in five weeks, MBA data showed.

The MBA's seasonally adjusted purchase index, a tentative early indicator of home sales, decreased 3.4 percent. Demand is down about 42 percent since the tax credit expiration.

The housing market is heavily reliant on mortgage finance giants Fannie Mae and Freddie Mac, which have been under a government conservatorship since September 2008, but their future role is a big question mark.

The U.S. government's role in housing finance should undergo "fundamental change," but it should still provide some guarantees in the mortgage market, U.S. Treasury Secretary Timothy Geithner said on Tuesday.

Another reading on state of the U.S. housing market will be published next week. The National Association of Realtors on Tuesday will report July existing home sales which are expected to fall, while the Commerce Department on Wednesday will release July new home sales data which is expected to be little changed.

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