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Lower Mortgage Interest Rates Out of Reach of Many Borrowers
Tight Credit Restrictions Sometimes Too Tight
Mortgage interest rates are near record lows but fewer of the potential borrowers can afford to purchase them.
The average 30-year mortgage interest rate has dropped to 3.97 percent and for a 15-year fixed mortgage it is 3.18 percent, according to mortgage financing giant Freddie Mac.
“Mortgage rates for most loan products fell to their lowest level since June 2013,” Mortgage Bankers Association chief economist Mike Fratantoni said in a statement this month. Part of the reason for the lower mortgage rates results from European investors concerned about slow economic growth turning to U.S. markets for more stable assets.
To qualify for the low interest rate, borrowers must have FICO credit scores of at least 740, putting it out of reach of many home buyers who could have obtained the necessary credit before the recession that started in 2008.
Government financial regulators have tacked on so many controls on the kind of runaway credit that caused the recession that many borrowers face “overlays.”
Overlays refer to additional expenses that would raise their mortgage payments. They can include higher down payments, higher closing costs and a requirement to purchase ”points” on a mortgage equal to at least one percent of the loan amount.
In addition to credit scores, lenders are now taking a closer look at prospective borrowers’ job history, cash reserves and debt-to-income ratio.
The high standards for lending were prompted largely by conservative Republicans outraged by the housing meltdown that led the nation into recession. They spearheaded efforts in 2008 to create the Federal Housing Finance Agency (FHFA), which monitors and sets standards for how Freddie Mac, Fannie Mae, the Federal Housing Administration and the Veterans Administration extend credit.
Now that the recession has subsided, Democrats and others are pressuring FHFA to ease their credit restrictions. In response, the agency is considering lowering minimum down payment requirements from 5 percent to 3 percent. FHFA officials want to keep the government out of the mortgage lending industry as much as possible to ensure loan money continues to flow to home buyers and businesses.
However, after the hard-knock lessons about credit created by the recession, some financial and political analysts are skeptical about FHFA’s proposals for less restrictive credit standards.
A recent Guggenheim Securities note to investors said that even if minimum down payments are lowered, the changes might not be “the game changers needed to get banks to take more risk.” In addition, Republicans in Congress are pledging a tough fight over loosening credit standards.