Mortgage applications decreased last week, as an increase in borrowing costs discouraged mortgage refinancing activity, the Mortgage Bankers Association announced Wednesday.

The Mortgage Bankers Association's composite index of applications declined 8.7% on a seasonally-adjusted basis to 508.6 from last week's 557.1. Compared to a year ago, the composite index is down 21.3% on an unadjusted basis.

The Refinance Index decreased 15.0% to 1,378.6 from 1,622.1 the previous week and the seasonally adjusted Purchase Index decreased 4.3% to 360.2 from 376.2 one week earlier.

Mortgage rates rise

Meanwhile, the average rate for a 30-year fixed loan rose to 6.57% from 6.24% the prior week. The average rate for a 15-year fixed mortgage increased to 6.14% from 5.78%. Also, the share of applications that involved a refinance declined to 37.4% from 39.8% one week earlier.

Created in 1990, the Mortgage Bankers Association's loan survey covers about half of all U.S. retail residential mortgage originations.

Economic Analysis: This is not what the U.S. Federal Reserve intended when it initiated its interest rate easing cycle in September 2007. Mortgage rates remain stubbornly high -- the average rate has risen about 60 basis points in the past six months; this is a phenomenon the U.S. Federal Reserve will have to watch closely. The Fed has cut benchmark, short-term interest rates by 325 basis points since September 2007, but mortgage rates have not fallen. That's a tell-tale sign that banks remain concerned about their portfolios and about sluggish housing market conditions.

For the housing sector to regain its sea legs -- and to help increase U.S. commercial activity -- mortgage rates must move toward the lower-end of their 10-year average range, ideally below 6% for a 30-year fixed rate mortgage.