By Julie Haviv

NEW YORK, Nov 13 (Reuters) - U.S. mortgage applications rose last week, recovering from an almost 8-year low, as potential borrowers took advantage of a sharp drop in interest rates, an industry group said on Thursday.
The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended Nov. 7 increased 11.9 percent to 425.0, up from the previous week when the reading hit its lowest since December 2000.
The increase in home loan demand indicates some sign of stabilization, according to Torsten Slok, senior economist at Deutsche Bank in New York.
"But, clearly given the global financial and credit situation, we are not out of the woods yet and we still need to have more support for the housing market," he said.
"Any government support for the housing market is warmly welcomed," he said.
U.S. housing finance giants Fannie Mae and Freddie Mac, this week were called upon to stage a plan to rescue homeowners. Federal Housing Finance Agency Director James Lockhart unveiled an initiative that would see the two companies lead a plan to help borrowers, namely by adjusting the interest rates on mortgages.
Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.24 percent, down 0.23 percentage point from the previous week. It was the largest drop since the week ended Sept. 12 when it fell by 0.24 percentage point to 5.82 percent.
Interest rates are below the peak of 6.59 percent reached during the summer, but above the 2008 low of 5.49 percent in January, according to the trade group.
Interest rates were below year-ago levels of 6.19 percent.
Treasury yields, which are linked to mortgage rates, have fluctuated sharply in recent months, causing home loan demand to shift sharply on a weekly basis.
The MBA's seasonally adjusted purchase index rose 9.0 percent to 284.4. The index came in well below its year-ago level of 432.6, a drop of 34.3 percent.
Overall mortgage applications last week were 39.9 percent below their year-ago level. The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was down 3.7 percent.

The group's seasonally adjusted index of refinancing applications jumped 16.1 percent to 1,248.4, but was down 46.1 percent from its year-ago level of 2,315.7.
The refinance share of applications increased to 45.1 percent from 42.9 percent the previous week.
The adjustable-rate mortgage (ARM) share of activity dropped to 2.3 percent from 2.5 percent the previous week.
That is in stark contrast to the ARM share of activity several years ago when it reached a record high of 36.6 percent in March 2005. The survey has been conducted since 1990.
Fixed 15-year mortgage rates averaged 5.90 percent, down from 6.14 percent the previous week. Rates on one-year ARMs decreased to 6.77 percent from 6.86 percent.
The U.S. housing market is currently suffering the worst downturn since the Great Depression. A huge supply of unsold homes, tighter lending standards and record foreclosures have pushed down home prices, deflating a bubble from the early part of this decade.
U.S. foreclosure activity in October rose 25 percent from a year earlier, although filings in California fell by double-digit percentage points for the second consecutive month due to a state law slowing the foreclosure process, according to a monthly report by RealtyTrac.

Foreclosure filings -- default notices, auction sales notices and bank repossessions -- rose by 5 percent from September to 279,561 in October, according to Irvine, California-based research firm RealtyTrac.

(Additional Reporting by Helen Chernikoff and Patrick Rucker, Editing by Chizu Nomiyama) Keywords: USA ECONOMY/MORTGAGES (Reuters Messaging: julie.haviv.reuters.com@reuters.net; e-mail: julie.haviv@thomsonreuters.com; +1-646-223-6153)

COPYRIGHT

Copyright Thomson Reuters 2008. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.