As mortgage rates fall, the bar is raised

Times Staff Writer

The government takeover of Fannie Mae and Freddie Mac has sent mortgage rates tumbling, prompting homeowners and would-be buyers to flood loan offices with phone calls.

But there’s a catch: Although the lower interest rates make it easier to get a mortgage, many lenders this week also raised the minimum down payment they’ll allow on a loan -- making it impossible for some people to qualify for a mortgage.

And the decline in rates doesn’t apply to you if you’re borrowing more than $730,000.


But for the traditional 30-year fixed-rate mortgages that Fannie Mae and Freddie Mac acquire from lenders, interest rates have fallen to about 6% this week after hovering above 6.5% most of the summer, said data tracker HSH Associates.

As a result, many people with pending loan applications who were waiting to lock in their rates have decided to take the plunge this week.

“People are locking in rates now at a pace we haven’t seen in years,” said Scott Lehrer, senior vice president at loan broker First Mortgage Corp. of Diamond Bar.

Jerry Wilk, an Irvine financial planner, locked in a 6.125% rate Tuesday on a mortgage to refinance his current one, on which he has been paying 6.75%.

He said the move would reduce his monthly payment by $200.

“I just don’t see another big drop in interest rates coming,” Wilk said. And with the market value of homes in Southern California still dropping, he said, “it could be much tougher to get a mortgage a year from now.”

The federal government’s seizure of Fannie and Freddie over the weekend reassured financial markets about the health of the mortgage giants.

That made investors worldwide willing to swallow lower interest rates on bonds issued by Fannie and Freddie. And because the companies -- in the wake of the subprime mortgage meltdown -- are now buying or otherwise financing the vast majority of new mortgages in the U.S., lower rates on their bonds translate into lower home-loan rates generally.

In certain parts of the high desert, where home prices have fallen as much as 45%, lower rates are helping to drive buyer interest in foreclosed properties, said Clem Ziroli, First Mortgage’s chairman. September is usually a so-so month for home sales, he said, “but it may be our best month this year in fundings,” including refinancings as well as purchase loans.

On the downside, Lehrer said, lenders spooked by free-falling home prices and surging foreclosures have imposed tougher lending standards.

In the latest example, he said, most banks this week immediately adopted new guidelines that Fannie Mae said it would implement next year.

Among them: Home purchasers must put down at least 15% of the purchase price, up from 10%. And if the owner of a rental home wants to refinance it and cash out some equity, the mortgage can now be for no more than 75% of the home’s value, compared with 90% during the housing boom.

“No lender wants to make a 90% loan today, because we haven’t hit the bottom yet on prices. If they keep going down it could be a 100% loan next month,” said Jeff Lazerson, president of Mortgage Grader, a Web-based loan shopping service.

Lazerson is seeing increased applications for both purchase loans and refinancings. Many of the homeowners looking to refinance are currently paying an initial fixed rate that will start adjusting in the next few years.

The lower rates apply only to loans that Fannie and Freddie are allowed to buy. In a move to ease the availability of mortgages, Congress this year raised the maximum amount of such loans to $729,750 from $417,000 in high-priced markets such as most of Southern California.

On Wednesday, people with a solid credit history borrowing no more than $729,750 could get a 30-year fixed-rate loan at a 5.75% rate if they paid 1% of the loan amount as an upfront fee, Lazerson said.

But those borrowing more than $729,750 were being quoted a rate of 8.125%, plus 3.5% of the loan value as an upfront fee.


Times staff writer Peter Hong contributed to this report.