Lower mortgage rates, which have recently dropped below 10 percent, 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 Association of Realtors said its "Housing Affordability Index" in December registered its highest level since May 1977. Using a mortgage rate of 9.84 percent, the average for December, the Realtors said a family earning the national median salary of $35,581 has 116.5 percent of the income needed to qualify for conventional financing covering 80 percent 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 percent last week from 9.61 percent the previous week.
It was the lowest average rate since 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 A. Tuccillo, chief economist for the Realtors.
He added, "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 homebuyers may have a tough time trying to take advantage of lower mortgage rates.
Some savings and loans, experts said, 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 some real estate markets.
"Borrowers' ability to qualify for loans is not improving," said Neil F. Dimick, national real estate director for the Deloitte & Touche accounting company. Mr. 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," he added.
Even adjustable-rate loans are losing their safe harbor status: At least two financial institutions, HomeFed Bank and Great Western Savings, began last month to make 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. "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," said Earl Peattie, president of Mortgage News Co., a publishing company in Santa Ana, Calif., that tracks the mortgage rates of 150 lenders.
But even if lenders eased their standards, many potential homebuyers would remain on the sidelines in the face of the economic and political uncertainty created by the recession 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 Association of Home Builders.
"Consumer confidence took a real nose dive after the August invasion of Kuwait."
Financial institutions said that 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, both the Federal Home Loan Mortgage Corp. (Freddie Mac) and Federal National Mortgage Association (Fannie Mae) will stop buying mortgages from lenders that don't have income and employment information verified by documentation.
In addition, Freddie Mac said it will also stop buying adjustable-rate mortgages written for more than 90 percent 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 secondary market.