Jan. 23 (Bloomberg) -- U.S. mortgage rates fell to a four- year low a day after the Federal Reserve cited a weakening economy in its emergency reduction of the benchmark overnight lending rate.

The drop may encourage up to 7 million homeowners to apply for new mortgages, many to avoid resets of adjustable rates, Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York, said in a report today. Lower monthly payments would put more money in their pockets and encourage consumer spending, he said.

The average U.S. rate for a 30-year fixed mortgage declined to 5.31 percent today, the lowest since March 2004 when the Fed's benchmark rate was 1 percent, according to Bankrate Inc., a research firm in North Palm Beach, Florida. Fixed rates are set by investors in mortgage backed securities based on their economic and inflation expectations.

``An increase in mortgage refinancings will eventually be a game changer, turning the dynamic on mortgage payments into a positive from a negative,'' said Crescenzi at Miller Tabak, a securities firm that specializes in institutional investors.

Homeowners will face more hurdles this time around in obtaining the loans, said Jay Brinkmann, the vice president of research and economics for the Mortgage Bankers Association in Washington. Mortgage applications in the U.S. jumped to an almost four-year high last week, propelled by a surge in refinancing, the trade group said in a study published today.

``With tighter credit conditions we do not know how many of these applications will become loans,'' Brinkmann said in the report.

Tougher Standards

About 40 percent of U.S. banks tightened underwriting standards on prime mortgages in 2007's third quarter, according to the most recent Federal Reserve Senior Loan Officer Survey, published in October.

For most borrowers, the stricter rules mean a return to standards that were typical in 2001, the beginning of five record-setting years for U.S. home sales and prices, said Henry Savage, president of PMC Mortgage Corp. in Alexandria, Virginia.

``You're going to have to make copies of your pay stub and some tax documents and fax them to your broker,'' Savage said. ``If you have good credit and some equity in your house, you can still get a loan.''

Home prices increased an average of 10 percent each year from 2001 to 2005, according to the National Association of Realtors. That's more than double the 3.9 percent average of the prior decade. Last year, the national median home price fell 1.9 percent, the first drop since the Great Depression, according to the Realtors' group.

``The people who are stuck are the ones who bought near the peak and now owe more than their houses are worth,'' Savage said. ``They're under water now, which means they'd have to write a big check to the bank to get out of their old loan.''

Jay Vogel, a loan officer with Residential Mortgage Services Inc. in Nashua, New Hampshire, said he's gotten 16 mortgages approved in the last 14 days, most of them refinances, a pace he hasn't seen since January 2006.

``December was my worst month ever, and January so far has been my second-best,'' said Vogel, 40, who has been in the mortgage business for seven years.

To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net.

Last Updated: January 23, 2008 16:26 EST