Mortgages are cheap - if you can get one?

According to the Federal Reserve, nearly a quarter of people who apply for loans are turned down. The denial rates tell only half the story. Many potential buyers aren't even applying for loans because they assume they can't get one. That shows up in credit scores for loans financed with backing from Fannie Mae and Freddie Mac. The average credit score has risen to 760 from 720 a few years ago. For FHA loans, the average score has gone to 700 from 660. Loans made to borrowers with sub-620 scores are almost nonexistent. Another factor keeping people out of the mortgage market is that lenders now require much more up-front cash. The median down payment for purchase is about 15%. During the housing boom, it approached zero. On most loans, banks want 20% down. On $200,000 purchases, that's $40,000, an insurmountable obstacle for many young house hunters.

Or, in New York City, where the median home price is $800,000, buyers need $160,000 up front. Industry insiders say all these factors have reduced the pool of buyers, lowering demand for homes and hurting prices. "We feel it really reduces the demand for houses," said Mike D'Alonzo, president of the National Association of Mortgage Brokers. "It's an unbelievable buyer's market, but there hasn't been as much activity as you would expect because not as many people qualify for loans." And it's about to get harder for buyers. Federal regulators proposed rules last week that are designed to discourage risky lending but that will also likely further restrict lending.

Banks would be required to keep 5% of some loans, specifically those with less than 20% down payments, on their books rather than selling them all off as securities. As a result, banks make be unlikely to issue loans where less than 20% is put down. So much for first-time buyers. "We think the new rules are appalling," said the NAHB's Howard. "Only the wealthy will be able to buy homes at low interest cost." It could also further erode consumer demand for homes. The immediate impact, should the new regulations get adopted, should be minor, according to Steve O'Connor, spokesman for the Mortgage Bankers Association. That's because Fannie, Freddie and FHA loans are all exempt from the requirements and they represent more than 90% of the market right now. The government, however, wants to reduce the presence of all three agencies in favor of private lenders, and banking experts fears the long-term impact of abandoning the field to mostly private companies.

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