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Mortgage Money’s Cheap If You Can Get It

Demand for mortgages from homebuyers and homeowners refinancing continues to rise, as rates continue to find new record lows in the wake of the Federal Reserve’s latest round of mortgage bond purchases.

But mortgage underwriting standards — largely dictated by Fannie Mae, Freddie Mac and the Federal Housing Administration — remain tight, and mortgages are difficult to obtain for those with less than sterling credit.

Rates on the workhorse 30-year fixed-rate mortgage averaged 3.36 percent with an average 0.6 point for the week ending Oct. 4, down from 3.40 percent last week and 3.94 percent a year ago, Freddie Mac said in releasing the results of its latest Primary Mortgage Market Survey. That’s a new low in Freddie Mac records dating to 1971.

For 15-year fixed-rate mortgages, popular with homeowners who are refinancing, rates averaged 2.69 percent with an average 0.5 point, down from 2.73 percent last week and 3.26 percent a year ago. That’s a new low in records dating to 1991.

Rates on five-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) loans averaged 2.72 percent with an average 0.6 point, up from 2.71 percent last week but down from 2.96 percent a year ago. Rates on five-year ARM loans hit a low in records dating to 2005 of 2.69 percent during the week ending July 19.

For one-year Treasury-indexed ARM loans, rates averaged 2.57 percent with an average 0.4 point, down from 2.60 percent last week and 2.95 percent a year ago. Rates on one-year ARM loans have never been lower in records dating to 1984.

A third round of quantitative easing (“QE3) announced by the Federal Reserve on Sept. 13 will boost government purchases of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac by $40 billion a month for an indefinite period. When the government buys mortgage bonds, that pushes their prices up, and yields down.

“Fixed mortgage rates fell again this week to all-time record lows due to the mortgage securities purchases by the Federal Reserve and indicators of a weakening economy,” said Freddie Mac Chief Economist Frank Nothaft in a statement.

Nothaft noted that the final estimate of second quarter GDP growth was revised down to 1.3 percent in the second quarter, representing the slowest growth in a year. Personal incomes rose only 0.1 percent in August, and an increase in July was revised downward. Also, the National Association of Realtors reported pending home sales fell 2.6 percent in August, well below the market consensus forecast of a slight increase, Nothaft said.

More recently, a survey by the Mortgage Bankers Association showed applications for purchase loans were up a seasonally adjusted 4 percent during the week ending Sept. 28 compared to the week before, and up 11 percent from a year ago.

Many homeowners have already refinanced to take advantage of low rates — the Fed’s first round of quantitative easing, $1.25 trillion in purchases of Fannie and Freddie debt and MBS which wound down in 2010, helped push mortgage rates below 5 percent.

But the MBA said requests for refinancings jumped last week to the highest level since April 2009, accounting for 83 percent of all mortgage loan applications.

If mortgages are cheap, they’re not easy to come by for borrowers with blemished credit.

Ellie Mae Inc., which provides mortgage origination software to lenders, reports that the average FICO score for mortgages approved in August was 750, with borrowers making down payments averaging 21 percent and having front-end debt-to-income ratios of 23 percent.

The average FICO scores for purchase mortgages eligible for purchase and guaranteed by Fannie Mae and Freddie Mac was 763, while FICO scores on FHA-backed purchase loans averaged 700.

FICO scores range from 300 to 850 and, as syndicated columnist Ken Harney noted in the Washington Post, 78.5 percent of all consumers have scores between 300 and 749. That means only about one in five consumers have FICO scores equal to the average score of borrowers closing on Fannie and Freddie loans in August.

Fannie Mae Chief Economist Doug Duncan told Harney that underwriting could loosen up as banks begin to shed fees they’ve tacked on to mortgage quotes to address risk in the aftermath of the housing bust. Duncan expects lenders’ fears about buyback demands from Fannie and Freddie and regulatory requirements stemming from the Dodd-Frank financial reform bill may also dissipate.

“In the meantime, don’t look for any dramatic relaxations,” Harney concludes. “To get a mortgage, you’ll generally need high scores, big down payments — except for FHA, which accepts 3.5 percent down — plenty of time and reams of documentation.”