Dec. 3 (Bloomberg) -- Mortgage applications in the U.S. surged by a record last week as lending rates plunged after the Federal Reserve pledged to buy mortgage-backed debt.

The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan jumped 112 percent to 857.7, the highest level since March, from 404.4 the prior week. The group’s refinance index skyrocketed 203 percent, while the purchase index rose 38 percent.

The Fed’s announcement sent the rate on 30-year fixed mortgages down to a three-year low, sparking demand to refinance adjustable-rate loans. Even so, rising unemployment and faltering consumer confidence will keep most buyers sidelined, signaling the three-year housing slump hasn’t reached bottom yet.

The drop in rates was “a big, early Christmas gift for borrowers who have enough equity -- and solid enough credit -- to qualify for a refinance loan,” Michael Larson, a housing analyst at Weiss Research in Jupiter, Florida, said before the report.

The refinancing gauge surged to 3,802.8 from 1,254 the prior week, while the purchase index increased to 361.1 from 261.6.

The Fed on Nov. 25 pledged to purchase up to $500 billion in so-called agency debt as well as up to $100 billion in direct debt of Fannie Mae and Freddie Mac, the world’s two largest mortgage buyers, and Federal Home Loan Banks.

“This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally,” the Fed said in a statement.

Rates Tumble

The plan sent mortgage rates tumbling. The average rate on a 30-year fixed-rate loan dropped to 5.47 percent last week, the lowest level since June 2005, from 5.99 percent the prior week. At the current rate, monthly borrowing costs for each $100,000 of a loan would be about $565.91, down $71 from three months ago.

As more homeowners seek to switch out of their adjustable- rate loans, the share of applicants seeking to refinance mortgages surged to 69.1 percent from 49.3 percent of total applications in the prior week.

Still, MBA’s weekly numbers can be volatile. For example, in September, refinancing rose 88 percent in the second week of the month, only to fall 42 percent in the subsequent two weeks.

Today’s report also showed the average rate on a 15-year fixed mortgage decreased to 5.13 percent from 5.78 percent. The rate on a one-year adjustable mortgage fell to 6.61 percent from 6.87 percent the prior week.

Falling Prices

Record levels of foreclosures are driving down prices, helping to underpin purchases. Home prices have fallen by about a fifth from their peaks in mid-2006, according to the S&P/Case- Shiller home price index.

Even so, combined sales of new and existing homes in October were at a 5.4 million annual pace, down 36 percent from their July 2005 peak. Housing starts in October fell to their lowest since records began in 1959, the government said last month.

D.R. Horton Inc., the largest U.S. homebuilder, last month reported its sixth straight loss.

“People have cold feet,” Donald Tomnitz, D.R. Horton’s chief executive officer, said on a conference call. “Until housing prices bottom out, I think the cancellation rates are going to continue to increase or at least stay high.”

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

Last Updated: December 3, 2008 07:00 EST