Mortgage applications fall 16.6 pct

NEW YORK (Reuters) - Demand for applications to buy homes and refinance mortgages sank 16.6 percent last week, a trade group said on Wednesday, in the heart of a financial crisis that has sapped consumer confidence.

The Mortgage Bankers Association's seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, slid last week to 408.1.

The trade group's purchase index fell 10.9 percent to 279.3 in the week ended October 17, while its refinancing applications gauge tumbled 23.5 percent to 1,158.8.

A drop in the 30-year mortgage rate of 19 basis points to an average 6.28 percent rate failed to stem the slide in applications.

The 30-year home loan fixed rate this year was as high as 6.59 percent during the summer and as low as 5.49 percent in January, according to the Mortgage Bankers Association.

The week's results include an adjustment to account for the Columbus Day holiday on October 13.

Underscoring the soft demand for mortgages, the trade group said the U.S. economy is in a recession that will persist until the middle of next year.

"A recession appears to be under way, as evidenced in rising unemployment, contracting manufacturing activity and declining inflation-adjusted consumption spending," Jay Brinkmann, the MBA's chief economist, said on Tuesday at the group's annual convention in San Francisco.

"We expect residential investment to decline further through the first half of 2009, due to the excess of supply of houses and weakened demand from the recession."

The housing sector has more pain to endure, Brinkmann said, with the worst downturn in new home sales and construction still ahead and the foreclosure rate set to rise.

(Additional reporting by Patrick Rucker in San Francisco; Editing by Leslie Adler)