Mortgage applications for home loan refinancing fell for a second straight week, dropping to its lowest level since early August, as rock-bottom interest rates failed to boost demand.

While historically low mortgage rates have been a glimmer of hope for a housing market that has struggled to find footing in the absence of government support, it failed to foster demand for loans to purchase a home last week.

The Mortgage Bankers Association on Wednesday said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended September 10 decreased 8.9 percent.

The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was down 0.8 percent.

The MBA's seasonally adjusted index of refinancing applications decreased 10.8 percent, reaching its lowest level since the week ended August 6.

Home loan refinancing puts extra cash into consumers' hands that they can save, use to pay off existing debt or funnel into the economy through extra spending.

Torsten Slok, senior economist at Deutsche Bank in New York, said underwater mortgages -- where the amount owed on the mortgage exceeds the value of the home -- are one of the biggest banes of the homeowners.

This negative equity makes many of them unqualified for home loan refinancing and prevents some from selling.

Even if mortgage rates got as low as 3 percent these people still would not be able to refinance, he said.

Slok said a large amount of borrowers have an incentive to refinance, but they may have lost their jobs or the closing costs are too high.

Home prices will probably be flat until at least 2012, he said.

The housing market right now is an innocent bystander to the weak labor market and it may take years before many of those jobs come back, he said.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.47 percent, down 0.03 percentage point from the previous week. That is only 0.04 percentage point above the lowest level in the survey, which has been conducted weekly since 1990, reached two weeks earlier.

Interest rates were also below their year-ago level of 5.08 percent.

The housing market has been struggling since the April 30 expiration of popular home buyer tax credits. 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.

The MBA's seasonally adjusted purchase index, a tentative early indicator of home sales, decreased 0.4 percent, the first drop in four weeks.

John Walsh, president of Total Mortgage in Milford, Connecticut, said refinancing activity at his company has nearly doubled since June.

Many people do not have enough value in their home to refinance and at the same time lending guidelines are getting stricter and making it harder for even the most qualified people to get a loan, he said.

Mortgage rates this low are not going to come around again and people are going to kick themselves if they do not take advantage of it, he said.

The MBA said fixed 15-year mortgage rates averaged 3.96 percent, down from the previous week's 4.00 percent. Rates on one-year adjustable-rate mortgage, or ARMs, decreased to 6.89 percent from 7.00 percent.

(Editing by Diane Craft)

Deutsche Bank Mortgage