Rates are low, if you qualify

Hong is a Times staff writer.

The biggest savings for shoppers this holiday season may be in home mortgages, thanks to a decline in interest rates spurred at least in part by the latest federal financial rescue effort.

But it’s an open question whether consumers will actually want to take advantage of the cheaper loans -- or will be financially able to do so.

In Southern California, rates on 30-year, fixed-rate home loans for $417,000 or less have fallen to about 5.25% -- down about half a percentage point from a week ago -- for borrowers with strong credit and cash for down payments, mortgage brokers say.


Word of the lower rates came after the Federal Reserve on Tuesday announced a plan to purchase up to $600 billion of debt owed or guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. The Fed’s goal is to lower mortgage rates by reducing the borrowing costs of the government-backed mortgage finance giants.

Nationwide, average rates on 30-year, fixed-rate loans fell to 5.97% this week from 6.04% last week, marking the first drop below 6% since early October, Freddie Mac reported Wednesday. But this week’s results are based on rates set Monday and Tuesday, so they probably don’t fully reflect the Fed’s announcement.

The action is designed to prop up the ailing housing market, but it comes at a time of year when the real estate market traditionally hibernates as many sellers take their homes off the market for the holidays.

Homeowners who want to refinance existing mortgages may be more likely to take advantage of the lower rates, but many people who bought during the real estate bubble won’t be able to qualify for a new loan because they have little equity or are “upside down” -- owing more on their homes than they are worth.

“I anticipate it will increase refinance activity, but there will be nothing dramatic,” said Terrin Griffiths, an economist for the California Credit Union League, which represents credit unions in California and Nevada.

Jeff Lazerson, a Laguna Niguel mortgage broker, said all the customer calls he received Tuesday were from people seeking to refinance, not buy homes. Many are trying to get out of adjustable-rate mortgages scheduled to reset to higher rates next year, he said.


But most who called were rebuffed because they were upside down on their current mortgages or had credit scores too low to qualify.

“Out of all the people calling, about 30% at most can get help,” Lazerson said.

Adjustable-rate mortgages were especially popular in 2005 and 2006 because home buyers expected prices to continue to rise, enabling them to refinance before the loans reset. Instead, Southern California median home prices have tumbled and are now back to 2003 levels.

Those lower home prices have been luring some buyers -- the number of homes sold in Southern California was up 56% in October from a dismal level a year earlier.

But Griffiths, who said the Fed’s action would keep rates low for many months, said the market would continue to struggle for two reasons: “People still need a down payment, and they have to have the nerve to buy in a declining market.”

To get the latest low interest rates, buyers can’t have holes in their applications, Lazerson said.

A 30-year, fixed-rate mortgage for up to $417,000 was available at 5.25% on Wednesday to those who could put 25% down and had a credit score of 740 or more, he said. Such “conforming” loans are eligible to be purchased or guaranteed by Fannie Mae or Freddie Mac.


Borrowers with a 20% down payment and 720 credit score could get a 5.375% rate on such loans.

The median U.S. credit score is 723.

Loans between $417,000 and $729,000, which only recently became eligible to be purchased by Fannie or Freddie, are now called “conforming jumbos” and generally carry rates an eighth of a percentage point higher than traditional conforming mortgages, Lazerson said.

Jumbo mortgages, those over $729,000, carry interest rates just under 8% and remain very difficult to obtain, Lazerson said. Because Fannie and Freddie can’t buy jumbo loans, the rates on them are unlikely to be affected by the Fed’s plan.