U.S. mortgage applications fell for a second straight week, largely reflecting a drop in demand for home refinancing loans, an industry group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended September 28 decreased 2.7 percent to 636.7.

Some market analysts say mortgage application data has been artificially inflated in recent months because prospective borrowers file multiple applications to obtain a single loan due to widespread tightening of lending standards.

This activity is a result of a sharp rise in defaults in the subprime mortgage market, which caters to borrowers with poor credit histories.

Applications were 0.4 percent above their year-ago level. The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was up 0.5 percent to 655.4.

INTEREST RATES FALL

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.32 percent, down 0.06 percentage point from the previous week. Interest rates were above year-ago levels at 6.24 percent.

The MBA's seasonally adjusted purchase index, fell 1.8 percent to 411.4, its lowest level in over five months. The index still came in above its year-earlier level of 404.6, a rise of 1.7 percent.

The group's seasonally adjusted index of refinancing applications decreased 3.8 percent to 1,950.4. The index was down 1.0 percent from a year ago when the index stood at 1,970.8.

The refinance share of applications decreased to 46.0 percent from 46.4 percent the previous week.

Recent U.S. housing industry indexes, while volatile, generally point to a weak outlook for the industry, suggesting a delayed recovery for the hard-hit sector.

Fixed 15-year mortgage rates averaged 5.95 percent, down from 6.06 percent. Rates on one-year adjustable-rate mortgages (ARMs) increased to 6.21 percent from 6.09 percent.

The ARM share of activity increased to 13.8 percent, up from 12.2 percent the previous week.

The MBA's survey covers about 50 percent of all U.S. retail residential loans. Respondents include mortgage banks, commercial banks and thrifts.

Mortgage