Mortgage Rates Still Cling To 6% Despite Easier Credit

Mortgage rates remained near 6% this week--and are even up slightly from the previous week--despite Federal Reserve efforts to push interest rates lower.

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A 30-year fixed-rate mortgage currently costs 5.68 percent, slightly above the 5.66 percent a week ago, according to Bankrate.com. The rate has fallen a bit, though, since hitting 5.74 percent just before the Fed announced a three-quarter-point rate cut last Tuesday.

Still, Fed efforts to ease credit haven't had much impact on mortgage rates. Banks remain reluctant to lend money to homebuyers because so many mortgages have soured over the past year. And investors are leery of buying mortgage-backed securities, which makes funding mortgages that much harder.

Instead of lending money, banks are using the easier credit to boost their balance sheets and pay dividends. The result has been little relief in mortgage rates at a time when the housing industry is suffering from a pronounced lack of buyers, driving sales to their lowest point in decades.

The slowness in real estate has confounded analysts who consider current interest rates a strong enticement for buyers to get back into the market.

"Conforming fixed-rate mortgages are still below the 6 percent mark," said Greg McBride, senior financial analyst for Bankrate.com. "That's down sharply from a few weeks ago and that is very attractive territory for both homebuyers and refinancers."

Still, those who have watched the Fed drop bank lending rates aggressively since September 2007 continue to look for more movement in mortgages, something unlikely to happen in the present banking climate.

"The biggest misconception that borrowers have is that fixed mortgage rates are directly related to moves by the Fed," McBride said. "In reality, fixed rates are tied to long-term interest rates and march to the beat of their own drummer. With conforming rates still around 6 percent, that is hardly an impediment to a well-qualified buyer."

But banks indeed have tightened requirements, and the days of 100 percent loan-to-value loans for buyers who can't document their income -- so-called "no-doc" loans -- are generally considered a thing of the past.

Many lenders are requiring a 15 percent down payment or equity before lending. At the same time, Fannie Mae and Freddie Mac , secondary mortgage brokers who buy up initial mortgages, have issued tighter lending requirements to banks.

And investors continue to be wary of mortgage-backed securities, turning instead to the safe haven of Treasury bonds even though they have significantly lower-yields than their counterparts in the mortgage industry. That in turn dries up liquidity and makes banks more particular as to whom they are lending money, with decent credit and some money for a down payment looming far larger following the subprime meltdown.

"Even for borrowers with good credit, lenders want them to have some skin in the game," McBride said. "You have to bring something to the closing table other than a pen to sign the deal with, and that means a larger down payment."

McBride declined to give any long-term predictions about the trend of rates, but the consensus among analysts is that rates actually could trend upwards, depending on further developments in the embattled financial sector.

"Mortgage rates historically go through very short periods of volatile movement followed by prolonged periods of very little movement. We've been in one of those periods of very volatile movement in rates just over the last month or so," he said. "The credit crunch is the unknown aspect of this, and another financial event could be the catalyst for more volatility."

© 2008 CNBC.com