Updated

Mortgage applications fell for a fourth straight week last week despite a jump in refinancings as lower interest rates on fixed-rate loans enticed home-owners to switch out of adjustable-rate mortgages, an industry trade group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity for the week ended December 30 fell 1.5 percent to 545.9 from the previous week's 554.1. Volume was the lowest level in 3-1/2 years, since the week ended May 24, 2002, when the index reached 516.9.

The group's seasonally adjusted index of refinancing applications rose 8.3 percent to 1,363.2 from 1,259.1 the previous week. The index rose for the first time in four weeks.

However, refinancing volume was still at the lowest level since the week ended June 4, 2004.

"Refinance activity will continue as homeowners refinance out of adjustable rate mortgages and into fixed-rate programs now that there is virtually no difference between long- and short-term interest rates," said Bob Walters, chief economist at Quicken Loans, an online mortgage lender.

Rate spreads on fixed and adjustable-rate mortgages have been narrowing along with the flattening of the Treasury bond yield curve. The curve, which represents long- and short-term rates on a graph, inverted last week, when short-term rates rose above those of longer-dated debt.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.15 percent, down 0.06 percentage point from the previous week's 6.21 percent.

The 30-year fixed-rate mortgage, the industry benchmark, is substantially above its 2005 low of 5.47 percent in late June, but below the 6.33 percent high reached in the week of November 11.

Fixed 15-year mortgage rates averaged 5.74 percent, down from 5.76 percent the previous week. Rates on one-year adjustable-rate mortgages rose to 5.41 percent from 5.36 percent.

The MBA's soft data adds to the evidence that a slowdown in the U.S. housing market has arrived after the historic boom of recent years that brought double-digit home price appreciation in some areas of the country.

However, views vary on whether the market is a bubble about to burst or whether it will taper off gradually.

The MBA's seasonally adjusted purchase mortgage index fell 3.4 percent to 418.3 from the previous week's 432.9, its lowest since last February. The index is considered a timely gauge on U.S. home sales.

An adjustment was included in the data to help account for the reduced application activity during the holiday week, the MBA said.

The ARM share of mortgage activity fell to 28.8 percent of total applications from 32.5 percent the previous week, the lowest level since last September. ARM demand reached a 2005 high of 36.6 percent in late March.

Refinancings, however, increased as a percentage of all mortgage applications, rising to 42.7 percent last week from 40.2 percent, the MBA said.

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