Rates for prime borrowers with 20 percent down were down again last week.

The 30-year fixed averaged 4.71 percent with an average 0.7 point for the week ending 3 December compared to 5.53 percent a year ago.  The 15 year fixed rate averaged 4.27 percent with an averate 0.6 point compared to 5.77 a year ago.  The 15 year rate has never been lower in the years since Freddie Mac started tracking them in 1991.

I believe a key component of these low rates has been the Federal Reserve program to purchase up to $1.25 trillion in mortgage backed securities issued by Fannie Mae, Freddie Mac, and Ginnie Mae. It is important to note that the program is winding down towards the end of March 2010. The Fed is gently reminding all of us that the program is going away, information we would be wise to keep in mind.

The Mortgage Bankers Association projects 30 year fixed mortgages will hit 5.4 percent in 2010, 6 percent in 2011, and 6.3 percent in 2012.

Headline writers will have to come up with something other than “historic lows” to describe interest rates over the next few years.

Although FHA loans aren’t that common in Carmel and Pebble Beach, they are playing a role in other lower priced areas such as Seaside, Marina, and Salinas. Having said that, two of my recent transactions in Carmel-by-the-Sea have included FHA loans because the “cost of money” under the FHA loan was such that the buyer’s opted for the loan even though they could have paid cash.

While the exact changes that will be coming are still being debated, it is likely that the minimum down payment for FHA loans will increase, the minimum FICO scores for new borrowers will go up, and probably the maximum seller concessions will be reduced from 6 percent to 3 percent.

The minimum FICO score for FHA backed loans was raised from 500 to 580 earlier this year although most lenders actually set their minimums at higher levels usually around 620.

FHA’s move to tighten requirements is partly in response to the continued tightening of guidelines by Fannie Mae and Freddie Mac. Fannie Maie will implement a minimum 620 FICO score along with other tightening requirements next week.

A quick summary on the stimulus Bill of 2009 as it relates to home buyers in Carmel, Carmel Valley, Pebble Beach and other areas of Monterey County.

> First Time Homebuyer’s Credit – First time homebuyers (which is defined as not owing a home within the past three years), are now eligigle for a tax credit of $8,000 or 10 percent of the purchase price, which ever is less. The entire $8,000 should apply for Monterey County as we’re not likely to see many sales below $80,000. Purchasers have until November 30th to purchase their primary residence. The credit does not apply to second homes or investment properties and is a direct $8,000 reduction in your Federal Tax liability. To apply is as simple as filling out your 2009 Federal Tax form next year. The National Association of Home Builders, www.nahb.org has information on their web site about the tax credit. Please consult a tax profession to be certian you qualify.

> 2008 Jumbo Agency loan limit of $729,750 has been restored for Monterey County. This may be the bigger boost to the Monterey housing market as the most recent Jumbo Agency limit has been $483,000. The “jumbo agency” loan category applies to “Fannie Mae,” “Freddie Mac” and “FHA” loan products. Guidelines and rates are similar to standard programs. These products will be a helpful boost to the mid-range housing market, i.e. $500,000 — $950,000. The $729,750 limit will be effective for the 2009 calendar year.

Admittedly many of the homes that sell in Carmel, Pebble Beach, Carmel Valley and over the hill in Monterey and Pacific Grove are priced such that most buyers need a “jumbo” or “non-conforming” loan. “Jumbo” loans are the loan product that has been most changed by the current credit crunch. The cost of these higher principal loans is much higher and the hurdles that have to be overcome to be approved can be extremely tight.

Lenders used to make these loans to a home buyer and a short time later sell them to investors on the secondary market. The collapse in demand for these loans (turned into securities) has made lenders much less enthusiastic about lending.

“Conforming loans” on the other hand conform to government guidelines (set by the Office of Federal Housing Enterprise Oversight (OFHEO)) and can therefore be purchased by Fannie Mae and Freddie Mac, the two Government Sponsored Enterprises that are charged with facilitating the flow of credit.  Fannie and Freddie are continuously in the market for conforming loans. 

The Relevance To The Monterey Peninsula?

In 2008 the loan limits were raised to $729,750 for Monterey County. This allowed buyers to use conforming (less costly) loans to purchase higher priced homes. In January the loan limit for Monterey County reset to $483,000 while “high priced counties” reset to $625,500. Monterey was lower because of the high number of transactions in the Salinas Valley that pulled the median sale price for the year down.

Any increase in the conforming loan limits will be welcome news to buyers looking at $500,000 or more listings.

The First-Time Buyer Credit

 The bill also moves the first-time buyer credit up to $8,000 (from $7,500) and more importantly removes the requirement that it be paid back as long as the buyer stays in the home for at least three years. The credit is available for first time home buyers that purchase a home before the end of 2009.

The Federal Reserve recently published their quarterly survey of 84 banks. The survey asks each bank to summarize it’s trends and lending standards and if each bank’s lending guidelines are becoming more or less restrictive.

About 75% of the surveyed banks said their standards have tightened for residential mortgage loans. To quote the somewhat dry language of the report, “Large majorities of domestic respondents reported having tightened their lending standards…over the previous three months. About 80%…noted that they had tightened their lending standards…for revolving home equity lines of credit.”

Based on what I hear from clients and friends on the banking side, the percentage will probably approach 90% next quarter.