Mortgage applications in the U.S. fell 2.7 percent last week as purchases declined to the lowest since April and refinancing cooled.

The Mortgage Bankers Association’s index of applications to buy a home or refinance a loan dropped to 636.7 from 654.2 the prior week. The group’s purchase index slid 1.8 percent to 411.4, and its refinancing gauge lost 3.8 percent.

Rising defaults on subprime mortgages and harder-to-get loans are squeezing demand, deepening the housing slump and raising concern about a broader economic decline. Economists forecast sluggish sales will add to the glut of unsold homes and continue to depress property values this year.

“Housing has clearly entered a second downward spiral, with sales likely to fall significantly further in coming months,” John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, said before the report.

The mortgage bankers’ purchase index slid last week from 418.8 the previous week, the second consecutive decline. It was the lowest since the week ended April 20.

The refinancing index decreased to 1950.4 from 2026.5 the prior week.

Even with the declines, most economists agree the applications report still overstates demand because it only includes retail lenders, which have probably seen an increase in business as many wholesale brokers closed their doors.

The average rate on a 30-year fixed loan dropped to 6.32 percent last week from 6.38 percent, Wednesday’s report showed. At the current rate, monthly borrowing costs for each $100,000 of a loan would be about $620, or $5 more than a year earlier.

The average rate on a 15-year fixed mortgage fell to 5.95 percent from 6.06 percent, while the rate on a one-year adjustable mortgage rose to 6.21 percent from 6.09 percent.

Applications to refinance loans made up 46 percent of the total, down from 46.4 percent the prior week. The group’s fixed- rate mortgage index fell 4.4 percent and its measure of adjustable-rate mortgages increased 9.7 percent.

Industry and government reports last week showed sales of previously owned homes fell in August to a five-year low, and new home purchases plunged to the lowest level in more than seven years. The median price of new houses fell 7.5 percent from August 2006, the most since 1970.

A report yesterday showed the number of Americans signing contracts to buy previously owned homes dropped to the lowest level on record in August, signaling the housing will recession deepen.

Declines in home prices will make it harder for owners to refinance loans just as more interest-only and adjustable-rate mortgages are resetting, economists said.

Inventory Forecast

As foreclosures mount and more people cancel contracts on new houses, the glut of unsold homes may jump 27 percent to 6.5 million, according to New York-based CreditSights Inc.

KB Home, a Los Angeles-based builder, reported a third- quarter loss on costs to abandon land purchases. The company forecast conditions may worsen through the end of the year and into 2008.

“At this time, we are not seeing any indication” that housing will improve soon, Chief Executive Officer Jeffrey Mezger said in a conference call with investors on Sept. 27.

The Washington-based Mortgage Bankers Association’s loan survey, compiled every week since 1990, covers about half of all U.S. retail residential mortgage originations.

Source:

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