Last week mortgage rates plummeted to a five month low and took the steepest weekly dive in 28 years. Does this forecast a mini refinance boom? Not likely. Lower rates does not mean easier mortgages, this time around.

Lenders remain cautious and government assistance from HUD/FHA, and now Fannie Mae and Freddie Mac, is likely to remain onerous.

Low Rates and Fees Open Opportunity

In the take over of Fannie Mae and Freddie Mac the US government were looking for two immediate effects--steady global financial market nerves and stabilize US mortgage and financial markets.

The grand plan seems to be executing well. Foreign markets, generally speaking, rallied based on the bailout plan and takeover. Meanwhile, the US mortgage market got a dose of healing medicine with rapidly sinking mortgage rates and increase in mortgage applications.

Immediate reductions in rates and fees resulted from the US government being the new counter-party risk in 70 percent of mortgage lending. This restructuring of mortgage market risk makes mortgage-backed securities nearly as risk-free as US Treasury notes.

The second-order effect is sure to be the rush of borrowers sitting on the sidelines for home purchases and mortgage refinancing returning to there local mortgage broker. In addition, there is an emerging trend of investors mobilizing to acquire large numbers of distressed home assets--mostly in the foreclosure and bank sales market.

Credit Standards Will Remain Tight

However, for the average American mortgage borrower these new developments may only be a frustrating tease. Banks and mortgage lenders are unlikely to swing open their credit qualifications. Leaving most mortgage applicants still challenged to finance a new home purchase, home improvements, or refinancing.

Much of the last refinance boom was fueled by low or no-documentation loans. These loans required very little, if any documentation of you capacity to repay the loan. A practice that is believed to have caused much of the mortgage meltdown.

This time around FHA, Fannie, Freddie, and other mortgage institutions and insurers are expecting careful, complete documentation.

Interestingly enough the new housing bill that led the FHA modernization initiative does little to evaluate or price according to risk or credit score. So, many borrowers with dependable income, but have a few past dings to their credit rating are likely to find things a bit easier and certainly more affordable.

Mortgages More Affordable, but Unlikely to Solve Larger Problems

Mortgage borrowers will definitely be intrigued by the lower mortgage rates, but could it simply be a teaser rate? Fannie, Freddie bailouts and lower mortgage rates could fall short of cleaning up housing surpluses and refinancing resetting ARMs--two big challenges to a full mortgage recovery.

Published on September 17, 2008