NEW YORK (Reuters) - Consumers rushing to refinance a home loan or get a new one to take advantage of the lowest U.S. mortgage rates in nearly four decades are in for a surprise: the new rates aren’t for everyone.
The process takes longer and is often more costly for borrowers with larger loans and less than stellar credit.
“This market has weeded out people with bad credit. That’s the difference,” said Ellen Klein, a realtor with CENTURY 21 Christel Realty in Rockaway, New Jersey.
Most lenders are more conservative, demanding more documentation and downpayment, after being burned by record foreclosures on loans made with looser practices.
“If you have good credit the bank will take you, no problem, with a conventional mortgage. They just want to make sure you’re going to be able to pay the mortgage. Credit score is key these days,” Klein added.
Homeowners beckoned by the lowest mortgage rates at least since Richard Nixon was president are swamping lenders with applications to refinance, which can also slow the process.
Average 30-year rates sank to 5.01 percent in the past week, the lowest since Freddie Mac began its survey in 1971.
Government actions aimed at cutting borrowing costs and reviving the worst housing market since the Great Depression chopped mortgage rates by 1-1/2 points in just two months.
“Daily transactions have been at record numbers” in early January, building on momentum in December, typically a slow month because of holidays and wintry conditions, said Jonathan Corr, chief strategy officer at Pleasanton, California-based mortgage software provider Ellie Mae.
About a third of U.S. loans go through its systems. Transactions in credit, title, appraisal and lender submissions jumped more than 50 percent in the month of December, he said.
“Our closing document transactions are up over 50 percent as well month over month, and as such, I would say that loans are getting done at higher volumes in the last 30-plus days,” added Corr.
Lenders who said they rarely turned down an applicant during the record sales spree earlier this decade said business is rising even though they are rejecting borrowers who cannot meet the higher standards.
Higher credit scores are required for the best loan rates, there is usually a burdensome premium for mortgages larger than those bought by Fannie Mae and Freddie Mac.
These government-controlled home funding companies buy mortgages up to $417,000 from lenders, or larger in some high-cost areas, to hold or to collateralize securities.
Other homeowners, some say as many as one in every three, are unable to refinance mainly because their house price fell below the size of the mortgage.
“There is money available, and people can get loans. However, is it a little more difficult? It is,” said Joe Theisen, branch manager of Fairway Independent Mortgage, a Madison, Wisconsin-based broker/banker company.
“The underwriting standards, appraisal standards, the documentation of income and assets — the entire process, everybody from the originator to the lender to the underwriter, to the end investor who purchases the loan and services it is looking a lot more closely,” Theisen added.
Demand for more documentation of income and assets is also locking out many self-employed borrowers.
“The pendulum has swung all the way the other way,” said Theisen, who is also president of the Wisconsin Mortgage Professionals Association.
But those unable to qualify now probably should not have been approved during the boom, realtors and lenders agree.
Credit unions have been lending even as capital-constrained banks hoarded cash, said Daniel Penrod, industry analyst at the California Credit Union League in Rancho Cucamonga, California.
Fixed-mortgage portfolios at credit unions, typically more conservative lenders, grew 14.4 percent nationally in the first three quarters of 2008.
If home sales are slower to respond than refinancings, the main reason is job loss fears, several industry experts said.
“People are really standing on the sidelines now because they’re looking over their shoulder afraid to get a pink slip,” said Klein.
U.S. unemployment raced to a 16-year high in December, the Labor Department reported on Friday.
“Boosting home prices would be a little too Pollyanic” to expect as a quick result of the government’s interventions for housing, Penrod said. “Right now the idea isn’t growth, it’s to stop the decline.”