NEW YORK - U.S. mortgage applications fell for a second straight week, led by a plunge in demand for home refinancing loans as interest rates climbed, data from an industry group showed on Wednesday.

The Mortgage Bankers Association said rates on 30-year fixed-rate mortgages, the most widely used loan, remained above 5 percent, a level seen as a psychological tipping point.

The MBA said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week to October 16 decreased 13.7 percent to 641.0, its lowest since the week ended September 11.

The drop does not bode well for the hard-hit U.S. housing market, a primary driver of the worst U.S. recession since the 1930s. While the sector has found some footing after a three-year slump, it remains highly vulnerable to setbacks.

Low mortgage rates, high affordability and the government's $8,000 tax credit for first-time home buyers have helped.

But with the tax credit expiring on November 30 and distressed properties making up a high proportion of sales, the recent uptick in activity may mask uncertainty about the long-term outlook. The Obama administration is considering whether to back extending the popular tax credit but is skeptical the United States can afford the cost, Housing and Urban Development Secretary Shaun Donovan said on Tuesday.

Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley, said without an extension of the tax credit, home sales could easily fall 5 to 15 percent.

It is vital that we keep the first-time home buyer in the market, he said. I recommend a nine-month extension of the first-time home buyer tax credit until we get the natural momentum going.

The MBA said borrowing costs on 30-year fixed-rate mortgages, excluding fees, rose 0.05 percentage point from the previous week to average 5.07 percent.

The rate remained above the all-time low of 4.61 percent set in March, but were well below 6.28 percent a year ago.

Home sales have been amplified by the first-time home buyer tax credit, but not entirely due to it, said Michelle Meyer, an economist at Barclays Capital in New York. An improving economic outlook and greater affordability have also played a large role.

Applications to buy a home, a tentative early indicator of sales, dropped in the latest week. The MBA's seasonally adjusted purchase index fell 7.6 percent to 268.8, the lowest since the week ended August 7. The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was down 1.0 percent.

REFINANCING PLUNGES

The Mortgage Bankers seasonally adjusted index of refinancing applications decreased 16.8 percent to 2,808.0, the lowest since the week ended September 11.

Michael Moskowitz, president of Equity Now, a direct lender based in New York City and licensed in 13 states, said activity at his company has been flat in recent weeks, while at the same time they see underwriting guidelines tightening.

Borrowers with low credit scores are not calling and are dropping out of the market because they know they don't qualify for loans, he said.

The refinance share of applications fell to 65.0 percent from 67.4 percent, well below the peak of 85.3 percent seen in early January. The adjustable-rate mortgage share of activity increased to 6.4 percent, up from 6.2 percent the prior week.

The U.S. housing market has suffered the worst downturn since the Great Depression and its impact has rippled through the economy.

Home price declines have been moderating in many regions and in some areas have risen, but some analysts say prices may fall again, with a new wave of foreclosures in the pipeline.

Fixed 15-year mortgage rates averaged 4.51 percent, up from 4.44 percent. Rates on one-year ARMs increased to 6.86 percent from 6.71 percent.

(Additional Reporting by Corbett B. Daly and Andy Sullivan)

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