U.S. mortgage applications fell for a second consecutive week, reflecting a drop in demand for home purchase and refinancing loans even as interest rates sank, 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 August 24 decreased 4.0 percent to 615.2.

Applications, however, were 10.5 percent above their year-ago level.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.41 percent, down 0.08 percentage point from the previous week. Interest rates were above year-ago levels at 6.39 percent.

The four-week moving average of mortgage applications, which smoothes the volatile weekly figures, was up 0.3 percent to 647.9.

A sharp rise in defaults in the subprime mortgage market, which caters to borrowers with poor credit histories, has caused lenders to tighten requirements, making it difficult for those with weak credit to get a home loan.

The MBA's seasonally adjusted purchase index fell 4.0 percent to 424.0. The index, however, was above its year-earlier level of 375.9, a rise of more than 12 percent.

The group's seasonally adjusted index of refinancing applications dropped 4.2 percent to 1,729.6. The index was up 7.5 percent from a year ago when the index stood at 1,609.2.

The refinance share of applications increased to 40.4 percent from 39.9 percent the previous week.

U.S. housing industry indexes, in general, tend to be volatile, but recent data paint a poor picture and suggest a delayed recovery for the hard-hit sector.

Fixed 15-year mortgage rates averaged 6.10 percent, down from 6.20 percent. Rates on one-year adjustable-rate mortgages (ARMs) increased to 6.51 percent from 5.84 percent.

The ARM share of activity decreased to 15.0 percent, down from 18.6 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.

U.S. Mortgage