Cheaper Loans Fail to Revive Home Sales

Lower mortgage rates, which have recently dropped below 10%, have failed to jump-start the nation’s slumping housing market even though, a national real estate group says, single-digit mortgage rates have made homes more affordable than they have been in more than a decade.

The National Assn. of Realtors said its “housing affordability index” in December registered its highest level since May, 1977. Using a mortgage rate that fell to 9.84% in December, the latest figures available, the realtors said a family earning the national median salary of $35,581 has 116.5% of the income needed to qualify for conventional financing, which covers 80% of the national median home price of $91,900.

Separately, a Federal Home Loan Mortgage Corp. survey found that fixed-rate mortgages declined to a national average of 9.56% last week from 9.61% the previous week. It was the lowest average rate since that of mid-April 1987.

“What it shows is that there are conditions within the market that are conducive toward higher activity than we have now,” said John Tuccillo, chief economist for the realtor association. “Very clearly, as the index goes up, there is a better environment for increased housing activity.”

But with financial institutions hunkering down to improve their balance sheets in the face of a recession and government regulatory pressure, some potential home buyers may have a tough time trying to take advantage of lower mortgage rates.

Some savings and loans, experts say, are requiring borrowers to come up with more equity or are restricting the availability of their lowest fixed-rate mortgages to loan amounts below what may be needed to buy a home in the California real estate market, where the median price of a single-family home declined to $194,010 in 1990 from $195,650 a year earlier.

“Borrowers’ ability to qualify for loans is not improving,” said Neil F. Dimick, national real estate director for the Deloitte & Touche accounting firm. Dimick said the best fixed mortgage rates apply to so-called conforming loans that don’t exceed $191,250 and meet certain other underwriting requirements. “I’ve seen more (borrower) interest in refinancing opportunities than in taking on new mortgage debt.”

Even adjustable-rate loans are loosing their safe harbor status: At least two financial institutions, HomeFed Bank and Great Western Bank, last month began making it tougher for borrowers to qualify for such mortgages.

“What you are seeing is more tightening up in certain areas of underwriting,” said Samuel Lyons, senior vice president of mortgage banking at Great Western, which last month raised its qualifying interest rate for borrowers one percentage point higher than the less-than-8% teaser rate it had been using. “Lenders are taking a harder look at some borrowers.”

Of course, financial institutions are not turning down qualified borrowers.

Rather, they are ending the days of easy credit when some mortgages were made even though borrowers could provide little in the way of equity or extensive credit documentation.

“The lending industry called them ‘easy-qualifier’ loans, but we called them ‘pulse’ loans because all you needed was a pulse to get one,” quipped Earl Peattie, president of Mortgage News Co., a Santa Ana publishing firm that tracks the mortgage rates of 150 lenders.

But even if lenders eased their standards, many potential home buyers would remain on the sidelines in the face of the economic and political uncertainty created by the economy and the war in the Persian Gulf.

“The problem hasn’t been interest rates but (rather) the consumer confidence part of the equation,” said David F. Seiders, chief economist for the National Assn. of Home Builders. “Consumer confidence took a real nose dive after the August invasion of Kuwait. People aren’t buying much of anything.”

Financial institutions say they have adopted a hard line in response to the poor economy, government regulatory pressure directed at shoring up the nation’s financial system and growing cautiousness among the private and government agency investors who buy home mortgages from banks and thrifts.

This spring, the Federal Home Loan Mortgage Corp. (Freddie Mac) and Federal National Mortgage Assn. (Fannie Mae) will stop buying mortgages from lenders that don’t have income and employment information verified by documentation--a move that could hurt some self-employed borrowers who may find it time-consuming to document income.

In addition, Freddie Mac says it will also stop buying adjustable-rate mortgages written for more than 90% of a home’s fair market value and will buy third-party-originated loans “only on a negotiated basis,” said Michael Stamper, executive vice president for risk management at the agency.

The moves by Freddie Mac and Fannie Mae are significant and could alter lending standards throughout the financial community because the two agencies are the major purchasers of mortgages on the so-called secondary market. Primary lenders such as banks and thrifts sell their mortgages to the secondary market to raise cash to replenish their portfolios and make more loans.

“This is the most significant move reaffirming (credit) quality standards in a number of years,” Stamper said. “The industry had gotten into a false sense of security by relying on the increasing values of homes and not paying attention to the buyer’s credit.” Now that the industry is no longer seeing the kind of inflation in housing prices that occurred in the past, he said, marginal borrowers may have a tougher time.

CALIFORNIA HOME SALES

Percent change 1990 1989 Percent in sales median median change activity price price in price ’90 vs. ’89 Calif. (sf) $194,010 $195,650 -0.8% -17.1% Calif. (condo) 143,530 138,330 3.8 -12.1 Central Valley 113,940 97,370 17.0 1.9 High Desert 105,090 92,700 13.4 -12.7 Los Angeles 212,770 214,830 -1.0 -25.6 Monterey 237,730 232,190 2.4 -20.5 No. Calif. 143,800 115,080 25.0 -10.2 No. Wine Co. 179,180 160,800 11.4 1.6 Orange Co. 242,360 241,710 0.3 -21.7 Palm Springs/ Lower Desert 118,410 112,630 5.1 - 0.4 Riverside/ San Bernardino 132,130 124,120 6.4 -12.6 Sacramento 137,630 112,450 22.4 - 4.5 San Diego 183,210 181,920 0.7 - 6.9 S.F. Bay 259,290 260,720 -0.6 -21.6 Santa Barbara 219,580 233,070 -5.8 -19.2 Santa Clara 268,890 275,520 -2.4 -20.4 Ventura 238,790 247,660 -3.6 -30.0

Note: sf is single-family detached

Based on closed escrow sales of single-family, detached homes only (no condos). Movements in sales prices should not be interpreted as measuring changes in the cost of a standard home. Prices are influenced by changes in cost and changes in the characteristics and size of homes actually sold.

MORTGAGE RATES Average California mortgage rates each month. Source: Mortgage News Co.