U.S. mortgage applications fell for a second straight week, with a slump in demand for government loans driving activity to its lowest level in three months, data from an industry group showed on Wednesday.

Demand for home loan refinancing and purchase loans, a tentative early indicator of home sales, both slid, indicative of a housing market that remains highly vulnerable to setbacks just weeks away from the expiration of federal home buyer tax credits.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended April 9, decreased 9.6 percent, reaching its lowest level since the week ended January 1.

The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was down 6.2 percent.

Applications for government mortgages dropped substantially last week, following the implementation of an increase in FHA mortgage insurance premiums, Mike Fratantoni, the MBA's vice president of research and economics.

The MBA's seasonally adjusted purchase index decreased 10.5 percent. The decline in purchase applications was driven by government purchase applications, which decreased 19.1 percent from last week, compared to a decrease of 2.0 percent in conventional purchase applications.

The seasonally adjusted index of refinancing applications decreased 9.0 percent, continuing a recent trend brought on by a spike in mortgage rates.

Patrick Lashinsky, president and CEO of real estate brokerage ZipRealty, based in Emeryville, California, said sales activity is not as strong as late last year when first-time home buyers came out in droves to take advantage of a tax credit, which was originally set to end November 30.

The extension and expansion of tax credits has not made a significant impact this time around, he said.

The federal government's $8,000 first-time home buyer tax credit and a $6,500 credit for home owners buying a new residence will soon expire. Eligible borrowers must sign contracts by April 30 and close loans by June 30.

We are bouncing around a housing market bottom right now and we will probably see a very slow recovery, he said. Sales should pick up, however, because people have become more comfortable with where home prices are headed and their job situation.

The MBA said borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.17 percent, down 0.14 percentage point from the previous week. Interest rates were also above the year-ago level of 4.70 percent. An all-time low of 4.61 percent was set in the week ended March 27, 2009. The survey has been conducted weekly since 1990.

The MBA said fixed 15-year mortgage rates averaged 4.45 percent, down from 4.54 percent the previous week. Rates on one-year ARMs decreased to 7.02 percent from 7.03 percent.

The 30-year fixed-rate mortgage should jump to around 6 percent within the next 12 months, Lashinsky said.

By 2011, the housing market should enjoy consistent, but slow growth, he said.

Recent data on new and existing home sales point to a sector that is still struggling. Sales of newly built U.S. single-family homes fell for a fourth straight month to a record low in February, according to the Commerce Department. Meanwhile, the National Association of Realtors said sales of previously owned homes fell for a third straight month in February.

More key insight into the state of the U.S. housing market will emerge this week. The National Association of Home Builders Thursday afternoon releases its NAHB/Wells Fargo Housing Market Index. The Commerce Department on Friday releases March housing starts data.