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Higher rates cool U.S. mortgage market

New U.S. mortgage applications fell last week for the fifth consecutive week on a drop in refinancing requests, as mortgage rates climbed to their highest levels so far in 2004, an industry trade group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted market index, a measure of weekly mortgage activity, fell for the week ending April 16 by 5.6 percent to 744.5 from the previous week’s 788.6. The market index fell for a fifth straight week.

Average 30-year mortgage rates, excluding fees, rose by 7 basis points to 5.84 percent. Last week’s average 30-year rates were up 17 basis points from the comparable week a year ago.

Loan demand, especially to refinance, has fallen in response to a sharp rise in mortgage rates in early April.

The Washington trade group’s refinancing index fell by 10.9 percent to 2,550.3 from previous week’s 2,861.6. The refinancing index is half the recent peak set a month ago.

The group’s purchase index, a gauge of new loan requests for home purchases, however, edged up by 0.4 percent to 434.1 from 432.2 in the prior week.

The purchase index is off 13 percent from its all-time high of 501.6, set in January.

Even if mortgage rates climb moderately higher from current levels, lenders are still poised to enjoy a strong year.

“Everything will stay good,” said James Nutter, head of James B. Nutter Mortgage Co. in Kansas City, Missouri.

Still, Nutter said on Tuesday new loans issued through his firm have fallen about a third since mid-March indicating some slowing in new loan applications since rates have begun rising.

More adjustables
In response to the rising rates, more borrowers have been opting for adjustable mortgages and “hybrid” products whose rates are fixed for a period of time and float thereafter.

These adjustable and hybrid mortgages are risky for borrowers if they cannot afford the bigger monthly payments once the mortgage rates are reset at much higher levels.

At the moment, interest rates on some of these home loans are running more than two percentage points below rates on 30-year mortgages.

Applications for adjustable-rate mortgages accounted for 31.7 percent of all new requests filed last week, up from 29.4 percent the prior week.

Nutter said roughly half of new loans issued by his firm are in the hybrid area, mainly mortgages whose rates are fixed for either five or seven years.

Five to seven years is the average time that people tend to stay in a home and is one of the reasons for the popularity for these types of mortgages.