NEW YORK, Oct 21 (Reuters) - U.S. mortgage applications fell for a second straight week, led by a plunge in demand for home refinancing loans as interest rates climbed, data from an industry group showed on Wednesday.

The Mortgage Bankers Association said rates on 30-year fixed-rate mortgages, the most widely used loan, remained above 5 percent, a level seen as a psychological tipping point.

The MBA said its seasonally adjusted index of mortgage applications USMGM=ECI, which includes both purchase and refinance loans, for the week to Oct. 16 decreased 13.7 percent to 641.0, its lowest since the week ended Sept. 11.

The drop does not bode well for the hard-hit U.S. housing market, a primary driver of the worst U.S. recession since the 1930s. While the sector has found some footing after a three-year slump, it remains highly vulnerable to setbacks.

Low mortgage rates, high affordability and the government's $8,000 tax credit for first-time home buyers have helped.

But with the tax credit expiring on Nov. 30 and distressed properties making up a high proportion of sales, there may still be uncertainty about the long-term outlook. The Obama administration is considering whether to back extending the tax credit but is skeptical the United States can afford the cost, Housing and Urban Development Secretary Shaun Donovan said on Tuesday.

Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley, said without an extension of the tax credit, home sales could easily fall 5 to 15 percent.

"It is vital that we keep the first-time home buyer in the market," he said. "I recommend a nine-month extension of the first-time home buyer tax credit until we get the natural momentum going."

The MBA said borrowing costs on 30-year fixed-rate mortgages, excluding fees, rose 0.05 percentage point from the previous week to average 5.07 percent. This was above the all-time low of 4.61 percent set in March, but well below 6.28 percent a year ago.

"Home sales have been amplified by the first-time home buyer tax credit, but not entirely due to it," said Michelle Meyer, an economist at Barclays Capital in New York. "An improving economic outlook and greater affordability have also played a large role."

Applications to buy a home, a tentative indicator of sales, dropped with the seasonally adjusted purchase index USMGPI=ECI falling 7.6 percent to 268.8, the lowest since the Aug 7 week. The four-week moving average of applications, which smooths out weekly volatility, fell 1.0 percent.

REFINANCING PLUNGES

The seasonally adjusted index of refinancing applications USMGR=ECI decreased 16.8 percent to 2,808.0, the lowest since the week ended Sept. 11.

Michael Moskowitz, president of Equity Now, a direct lender based in New York City and licensed in 13 states, said activity at his company has been flat in recent weeks, while at the same time they see underwriting guidelines tightening