Mortgage application activity continued to descending for the fourth week, said the Mortgage Bankers Association of America (MBA). In the group’s latest Weekly Mortgage Applications Survey, the Market Composite Index sank 22.1% from the previous week to 788.6. A year ago, this index measured 1134.6.

The drop resulted from further declining refinance application activity as shown by Refinance Index, which plunged 30.7% to 2861.6, the MBA reported. The refinance share decreased to 50.4% of total mortgage applications from 57.1% the previous week.

MBA said the fall in refinance applications this week was not surprising given that mortgage rates have increased approximately 40 basis points (BPS) since roughly the middle of March.

The Purchase Index also aided the overall drop in mortgage application activity as it dropped 9.5% to 432.2, the group said.

As for rates, the 30-year fixed-rate mortgage averaged 5.89%, up 10 BPS from last week, according to Freddie Mac’s latest Primary Mortgage Market Survey. The figure stands higher than last year at this time, when the 30-year averaged 5.82%.

The average for the 15-year increased 11 BPS from last week to 5.23%, the government sponsored enterprise reported.

Freddie added that the average for the 1-year Treasury-indexed adjustable-rate mortgage (ARM) nudged up 4 BPS to 3.69%. Meanwhile, the MBA said the ARM share of total applications edged up to 29.4% from 28.8% the previous week. MBA said in its updated mortgage finance forecast Wednesday that the 1-year Treasury ARM rate will sustain a 3.6% average this year, while the ARM share will decrease to 23%.

In late afternoon trading Thursday, the 10-year Treasury note had a 4.39% yield and price of 96 27/32. Last week, the note closed at a 4.21% yield.

“With economic news continuing to point to a growing economy, the financial markets are beginning to think about the likelihood of inflation again,” Frank Nothaft, Freddie’s chief economist, said in a statement. “Not only that, but jobs creation, retail sales, and consumer prices jumped in March which buoyed market speculation that the Federal Reserve Board will raise rates sooner than expected. Add all that to the mix and mortgage rates were bound to rise this week.”

The economist noted that although economic indicators suggest March was an outstanding month, “we still have to see how April will fare, especially with higher — although still moderate — interest rates.“

The McLean, Va. mortgage giant forecasted earlier this month that the 30-year will average 5.6% in 2004, which is the same yearly average the MBA predicts.

MBA chief economist Doug Duncan said Wednesday that although Treasury bonds have had a volatile reaction to escalated numbers in the economic reports, he does not expect the high numbers to sustain throughout the year and therefore mortgage rates will remain low and stable.

The group predicted that the 10-year Treasury yield will average 4.2% throughout the year, increasing to 4.7% in 2005 and 5.4% in 2006. The 30-year fixed-rate mortgage average should remain below 6% until the second quarter of 2005 and reach 7% towards the end of 2006, MBA added.

As for a short-term outlook, Freddie predicted the second quarter average for long-term rates will be 5.5% and MBA said 5.6%.

Meanwhile, 56% of the industry panel surveyed at Bankrate.com said that rates will rise over the next month and a half, and the rest were evenly split on whether they’d go up (22%) or down (22%).