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The $275 billion program announced two weeks ago aims to reduce mortgage rates and stem the record tide of foreclosures that has dragged home prices down nearly 27 percent from their mid-2006 peak.

The Mortgage Bankers Association's seasonally adjusted mortgage applications index, made up of both purchase and refinance loans, fell 12.6 percent to 649.7 last week.

That was about half the level posted early this year, when average 30-year mortgage rates fell as low as 4.89 percent, according to the trade group.

Mortgage rates rose to 5.14 percent last week from 5.07 percent the prior week.

Potential buyers and refinancers have pulled back in the hopes that Obama's Homeowner Affordability and Stability Plan will cut borrowing costs and steady house prices.

"The housing stimulus package was announced but without sufficient detail to cause the market to have comfort that it would work, and (a sense about) when it would work," Michael Feder, chief executive at real estate data and analytics company Radar Logic, told Reuters on Tuesday.

The Mortgage Bankers Association's seasonally adjusted refinancing applications index slumped 15.3 percent to 3,063.4, less than half the level seen as recently as mid-January.

Its purchase index dropped 5.6 percent to 236.4 last week, having steadily descended from this year's high of 344.2 in the week ended Jan. 2.

An unwillingness to buy a fast-depreciating asset, a supply glut and swiftly evaporating jobs continue to contribute to the housing market swoon, analysts agree.

"While there is some demand from bargain hunters, housing conditions remain quite dire," Barclays economist Michelle Meyer wrote on Tuesday after the January National Association of Realtors pending home sales index slid to its lowest level since the index was started in 2001.

AP

"Consumers have lost confidence in the economy and are worried about job security, discouraging big-ticket purchases," and tight credit conditions are overshadowing relatively low mortgage rates, she added.

About 8.3 Million Mortgage Borrowers Are Underwater

One in five U.S. homeowners with mortgages owe more to their lenders than their homes are worth, and the rate will increase as housing prices drop in states that have so far avoided the worst of the crisis, a new study shows.

About 8.31 million properties had negative equity at the end of the year, up 9 percent from 7.63 million at the end of September, according to the study released Wednesday by First American CoreLogic.

The percentage of "underwater" borrowers rose to 20 percent from 18 percent over that time.

The study covered 43 U.S. states and Washington, D.C.

While states such as California, Florida and Nevada were particularly stressed, the study showed worrying signs of deterioration in relatively healthy parts of the nation.

"The economic slowdown is broadening," said Sherrill Shaffer, a banking professor at the University of Wyoming at Laramie and a former Federal Reserve official. "As more people lose jobs, it will be more difficult to sustain the levels of pricing and home ownership, and that is a big factor driving down housing prices in more parts of the country."

Arizona, California, Florida, Georgia, Michigan, Nevada and Ohio remained the most stressed states, with 62 percent of underwater borrowers and just 41 percent of mortgages. Other areas, though, also face more stress.

Connecticut, for example, saw a 25 percent increase in homes with negative equity, while Washington D.C. had a 44 percent increase.

"Even I continue to be surprised at the tentacles of this financial and economic debacle," said Robert MacIntosh, chief economist at Eaton Vance Management in Boston. "More people are being laid off, resulting in reduced income and therefore less consumption. That leaves fewer people with money to buy homes, and the mentality is that people believe they should wait six months rather than buy now. Less demand means falling prices."

Roughly 68 percent of U.S. adults own their own homes, and about two-thirds of these have mortgages.

Many economists expect the nation's unemployment rate to rise above 9 percent before the recession ends, up from January's 7.6 percent.

California, Nevada Under Stress

California had 1.9 million borrowers with negative equity, more than any other state, followed by Florida's 1.28 million.

About three in 10 borrowers in both states were underwater.

Mortgages

30 yr fixed 5.24% 5.40% 30 yr fixed jumbo 6.88% 7.00% 15 yr fixed 4.83% 5.06% 15 yr fixed jumbo 5.89% 6.02% 5/1 ARM 4.90% 4.68% 5/1 jumbo ARM 5.43% 4.98%

Find personalized rates: Bankrate.com

By other measures, Nevada was the most stressed, with 55 percent of owners having negative equity and borrowers on average owing 97 percent of what their homes are worth. About 28 percent owe more than 125 percent of their homes' value.

Michigan had 40 percent of its homeowners underwater, while Arizona had 32 percent.

New York fared best, with just 4.7 percent of borrowers with negative equity and an average 48 percent loan-to-value ratio, though this could change as employment and bonuses slide in the financial services industry.

According to the S&P/Case-Shiller Home Price Indices, prices of U.S. single-family homes slumped 18.5 percent in December from a year earlier, the biggest drop in the 21-year history of the data.

Many lenders are taking steps to keep borrowers out of foreclosure.

The Obama administration has backed legislation that could broaden powers of bankruptcy judges to modify mortgages for troubled borrowers. Among major lenders, only Citigroup has supported such a plan.

MacIntosh expects housing prices to keep falling until "well into" 2010.

"There is no magic bullet or magic arrow here," he said. "It is a question of trying to come up with ideas and seeing what happens. It could take a long time."

First American CoreLogic is an affiliate of title insurance and real estate services company First American.