Mortgage applications surged last week as borrowers moved refinance their loans to take advantage of lower interest rates, which continued to fall this week as turmoil in financial markets prompted investors to seek safer investments.

Mortgage loan applications were up a seasonally adjusted 33.4 percent from a week ago for the week ending Sept. 12, the Mortgage Bankers Association said, driven by an 88.1 percent surge in refinance applications. An index tracking purchase loans rose a more modest 2.4 percent, driven by a 5.3 percent increase in applications for conventional purchase loans. Applications for government backed purchase loans, largely FHA, fell 4.5 percent.

The government’s pledge to backstop mortgage financiers Fannie Mae and Freddie Mac and stand behind their debt provides reassurance to investors that the mortgage-backed securities issued by the companies are relatively safe investments.

"The drop in mortgage rates reflected the Treasury’s announcement that Fannie Mae and Freddie Mac were placed under conservatorship of the Federal Housing Finance Agency," said Orawin Velz, MBA’s associate vice president of economic forecasting, in a statement. "Renewed financial concerns should keep long-term Treasury yields low and translate to lower mortgage rates in the near term despite some widening in mortgage spreads. We expect to see meaningful increases in mortgage demand in coming weeks on both the purchase and refi sides."

Freddie Mac today released the results of its Primary Mortgage Market Survey for the week ending Sept. 18, which showed rates continuing to fall.

The 30-year fixed-rate mortgage (FRM) averaged 5.78 percent with an average 0.6 point for the week, down from 5.93 percent a week ago and 6.34 percent a year ago.

The 15-year FRM this week averaged 5.35 percent with an average 0.6 point, down from 5.54 percent a week ago and 5.98 percent a year ago.

Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 5.67 percent with an average 0.7point, down from 5.87 percent a week ago and 6.21 percent a year ago.

One-year Treasury-indexed ARMs averaged 5.03 percent with an average 0.5 point, down from 5.21 percent a week ago and 5.65 percent a year ago.

It was the fifth consecutive week 30-year fixed-rate mortgages declined, with rates falling a total of 0.75 percentage points during that time, said Frank Nothaft, Freddie Mac vice president and chief economist. Since Aug. 15, mortgage applications are up 58 percent, largely because of a 122 percent gain in applications for refinancing, Nothaft said, citing MBA figures.

Fixed-rate mortgages are "the predominant choice among homebuyers and families looking to refinance," Nothaft said, noting that during the first two weeks of September, 95 percent of new applications were for fixed-rate mortgages. Since the end of 2007, the number of ARM applications has fallen by almost 50 percent.

***

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