Mortgage Lending Loosens...But Far From Loose

David Paul Morris | Bloomberg | Getty Images

Mortgage applications are rising as rates are falling, and credit availability may finally be easing. Sounds like the perfect storm, in a good way. The question is: How long can it last? The tailwinds of this storm could easily turn.

The surge in mortgage applications is a sign that more mortgage-dependent buyers are coming back to the housing market, which for a while had been fueled by all-cash investors. Rising home values and cheap credit are just the incentives these buyers needed. Applications to buy a home are up 11.5 percent in the past year, to a three year high—although they are still well off their pre-crash levels.

Rates have been trending lower of late due to trouble overseas and the weak U.S. employment picture. That uncertainty continues to send investors to the safety of the 10-year Treasury, pushing yields lower. Mortgage rates loosely follow those yields. But that turned pretty quickly on last week's positive jobs report, and Tuesday the Dow Jones Industrial Average closed above the 15,000 mark for the first time in history.

"I think the higher stock market and low rates is a function of the Fed [Federal Reserve] just pumping liquidity into the system," said Paul Miller of FBR. "What you see, I believe, is some of that liquidity is leaking into the stock market, which is resulting in higher valuations for stocks. But the bond market is still flush with liquidity, and that is keeping mortgage rates low."

Should the Fed start winding down its asset purchases later this year, mortgage rates will rise. That would make home buying more expensive in an already rising price environment. But is that enough to stop housing's momentum? Perhaps not.

(Read More: What's Really Behind Home Price Gains)

"For mortgage payments to return to their long-term average of 22 percent of disposable income, 30-year fixed rates would have to rise all the way to 9 percent," noted Paul Diggle of Capital Economics. "Accordingly, we're optimistic that the nascent improvement in mortgage applications will be sustained."

In any case, it hasn't been the rates holding borrowers back, but the availability of mortgage credit. That may be easing as well.

Nearly 10 percent of senior loan officers surveyed by the Federal Reserve in April reported easing their lending standards for low-risk mortgages. That's an increase from the previous quarter. Banks were not, however, more willing to lend to borrowers with lower credit scores. This as 44 percent of loan officers surveyed reported demand for "prime" mortgages was moderately stronger.

(Read More: Old Ills Still Hit Big Banks)

Still-evolving regulations in the mortgage market continue to restrict access to credit. This week the regulator for Fannie Mae and Freddie Mac directed the two mortgage giants to begin abiding by the new qualified mortgage standards by January of next year.

That means no more interest-only loans, no terms beyond 30 years, and no loans with excessive points and fees (beyond what was set by the Consumer Financial Protection Bureau).

(Read More: Map: Tracking the US Real Estate Recovery)

"Even with mortgage rates near a 50-year low, too many families with solid credit who want to buy a home are being rejected," said David Stevens, CEO of the Mortgage Bankers Association at an industry conference this week. "Right now, overlapping regulations keep responsible young families from buying their first home."

Mortgage lending is coming back to life, and more borrowers are coming back to home ownership. The numbers, however, are still low and the barriers to entry still high. More regulations are coming, and there is still considerable uncertainty over the future of mortgage finance, as the fates of Fannie Mae and Freddie Mac still hang in the balance.

—By CNBC's Diana Olick; Follow her on Twitter @Diana_Olick or on Facebook at

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