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Home loans cheaper, but fewer qualify

Jumbos near 5%! Conventional loans at 4.75%! ARMs approaching 3%! For now

Home loan rates have fallen and customers are pushing in the door to refinance their loans, says Joe Blaston, who runs Sovereign Bank's Villanova home loan office. "In the last two weeks we have picked up 30% to 35%," to around $10 million a week. Sovereign, based in Boston, is among the largest Philadelphia-area home lenders, according to federal Home Mortgage Disclosure Act data.

It's not like the mid-2000s, when homeowners borrowed against every buck of equity in hopes their home value would keep going up. Some would-be borrowers are surprised to see appraisals come in at "10% to 30% below" peak 2005-06 levels, leaving little or nothing more to borrow, Blaston said. Besides "low appraisals, the issues we're hitting are job loss, and declining income for people that are self-employed," added veteran lender Michael Kent. "We have to do verification of employment seven days before closing," and a surprising number of applicants have to be turned down, because they are still losing jobs.

But cheaper money keeps leading them in. Conforming loan rates have fallen to around 4.75%, from 5%+, over the past year. More significantly, "Jumbo" rates on the bigger loans Fannie Mae won't buy (above $417,000, in the Philadelphia area) have tumbled from just under 7%, to around 5.25%. "That's because of liquidity returning to that market," Kent told me. Adjustable-rate loans are starting close to 3%.

Who's funding the big-mortgage business this time? "Particularly the banks are coming back into the market," Blaston said. "There's a pretty strong need by a lot of institutions to grow their balance sheets." Businesses still aren't borrowing; the credit card industry is fenced in by tough new federal consumer protection laws. But, by contrast, home values "have stabilized," and so "Bank of America, (JPMorgan) Chase and Wells (Fargo) have been getting back into jumbos." Even new mortgage-backed sales deals are starting to pick up, with an initial deal by Redwood Trust in early May ending a long drought.

"Part of what has happened is all the issues with the sovereign debt in Europe," Blaston added. With government running out of money Greece, Portugal and Spain, and depressing the Euro's value, "you've seen a real flight to quality." Skittish investors are bidding down yields on U.S. Treasuries, and that's spilling over into U.S. mortgage finance, which investors still see as government-protected.

"Construction loan permanent pricing has come down as well," Kent added. "Lenders are felling better about the overall housing market." Will this last into summer? "I don't make predictions," said Blaston, laughing, just a little.