News Excerpt:

NEW YORK (Reuters) - Applications for home mortgages increased last week, boosted by a surge in purchasing and refinancing activity even as mortgage rates rose, an industry group said Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity increased 17.4 percent to 887, adding to the previous week's 6.5 percent gain.

The MBA's seasonally adjusted index of refinancing applications climbed 25.6 percent to 2967.4 after rising 10.3 percent the prior week.

The MBA's purchase index, a gauge of loan requests for home purchases, rose 10.4 percent to 529.3, a record high, after climbing 3.6 percent the previous week.

"This week there was a combination of record-setting purchase activity as well as a substantial pickup in refinance applications, with the refinance index at its highest level since April 2004," Michael Fratantoni, senior director of single-family research and economics at the MBA, said in a press release.

According to the MBA, fixed 30-year mortgage rates averaged 5.62 percent last week, excluding fees, up 7 basis points from 5.55 percent the previous week. Rates were lower than in early April, when the fixed 30-year mortgage rate was at 5.91 percent.

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By David Leonhardt, The New York Times

For the past year, the Federal Reserve has been conducting a relentless campaign to raise interest rates. And over that same year, the rates that matter the most to many people - mortgage rates - have fallen to near 30-year lows.

Alan Greenspan, chairman of the U.S. central bank, told Congress on Thursday that the current situation is "clearly without recent precedent."

Even as the Fed has lifted its benchmark short-term rate by a quarter of a point eight times since last summer in an effort to keep inflation contained, the average rate on a conventional 30-year mortgage has fallen to 5.65 percent from 6.34 percent, according to BankRate.com. Mortgage rates have not been this low since 2003, when they were at their lowest level in at least three decades.

In his testimony, Greenspan warned that the American economy faced significant imbalances and made it clear that the Fed was not yet finished ratcheting up interest rates.

In effect, the bond market- where long-term interest rates, including those for mortgages, are set - is stimulating the economy while the Fed is trying to stabilize it.

"Since I've been in the business since the mid-1980s, this is the biggest disconnect between the bond market and the economy I've ever seen - easily," said Ethan Harris, the chief U.S. economist at Lehman Brothers and a former Fed staff member. "You've got almost the exact opposite response in the bond market from the normal response."

Although they have vexed policy makers and economists, falling long-term rates have benefited Americans across the economic spectrum.

"It's been fantastic," said Ed Schreyer, an executive in Cincinnati who has refinanced his mortgage seven times since buying his home in 2001 and refinanced the mortgage on a Colorado vacation home twice since buying it in 2003. "It's more cash in my pocket and less money going out the door."

The list of reasons for the falling rates is both long and controversial, taking in everything from the aging of the population to the growth of China. Economists generally argue that investor psychology also plays some hard-to-define role and that rates will soon rise. But they have been making similar predictions for the past year.

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