Many of the would-be borrowers who have bombarded mortgage lenders with phone calls since interest rates dropped last week are finding they don't qualify for loans.
Credit standards remain significantly tighter than they were two or three years ago. Some types of loans, such as adjustable-rate balloon mortgages, are difficult to obtain, and millions of homeowners cannot qualify for refinancing because they owe more on their current mortgages than their houses are worth.
"A dramatic tightening of underwriting standards and a rising number of underwater homeowners will eliminate more than half of the people" who could benefit from the new lower rates, said Guy Cecala, publisher of Inside Mortgage Finance.
To qualify for a conventional 30-year loan for $400,000 at a fixed rate of 5.5 percent, a consumer would need a credit score of 680, a down payment of 10 percent and a debt-to-income ratio of 45 percent or less, said Brian Bonnet, president of Signature Mortgage Services in Alexandria.
While acknowledging that credit standards had tightened this year, Mr. Bonnet emphasized that a buyer with solid credit could obtain a Federal Housing Administration-insured loan of $625,000 bearing a 5.5 percent fixed rate and requiring a down payment as low as 3.5 percent.
Mortgage rates fell immediately Nov. 25 after the Fed announced its extraordinary plan to spend $600 billion purchasing debt and mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae.
"This is as big as it gets," said Bob Walters, chief economist of Internet lender Quicken Loans. Mr. Walters reported that mortgage rates instantly dropped three-quarters to 1 percentage point, reaching 5.4 percent to 5.5 percent, after the Fed announced its program.
Many lenders expect rates to keep dropping.
"Mortgage rates have been artificially high this year mostly due to panic and disruption in the credit markets, especially for anything with a mortgage label on it," said Mr. Cecala. "A more appropriate rate for 30-year fixed rate mortgages would have been 5 percent or less," given how the rate on the Treasury 10-year note has plunged, Mr. Cecala said. Mr. Cecala expects rates to reach 5 percent by the end of the year.
For those who do qualify, the savings can be substantial, especially if their initial below-market "teaser" rate is scheduled to adjust upward in the near future.
A 30-year, $350,000 mortgage bearing a fixed rate of 5.25 percent instead of 6.5 percent would save a borrower $280 per month. A half-percentage-point reduction to 5.5 percent would yield a monthly savings of $111.
"Many people have been sitting on the sidelines, and they are now the ones who can take advantage of this opportunity," said Mr. Walters. "It's an early Christmas present."
Mortgage brokers in some areas of the country were quoting 30-year fixed rates as low as 5.25 percent late last week for borrowers with stellar credit and substantial equity in their homes. As recently as July and August, 30-year fixed-rate mortgages averaged about 6.5 percent, according to national surveys by Freddie Mac.
"Consumers should not be holding out for a lower interest rate," Mr. Bonnet cautioned. "In the last 50 years, rates have not been appreciably lower than they are today," he said. "Waiting for a lower rate could be a fool's game," especially given the extreme volatility that has characterized the mortgage market during the past year.
Mr. Walters also cautioned against delay. "You are betting against history if you are waiting for interest rates to go lower," he said.
"Mortgage rates dropped a lot in a matter of a day, which is just what the Fed wanted," said Patrick Newport, an economist at IHS Global Insight who specializes in housing. "However, it will only affect mortgages eligible to be purchased by Fannie and Freddie," Mr. Newport said. Although that is a huge market, it likely will exclude many of those who need the most help to avoid foreclosure.
For example, subprime loans and many exotic mortgages, which required the homeowner to pay interest only for several years, will not be affected by the Fed's initiative, Mr. Newport said.
Jumbo loans that are too big for Fannie and Freddie to buy (more than $730,000 for now, and more than $625,000 beginning Jan. 1) will continue to command interest rates in the neighborhood of 8 percent, analysts said.
The interest-rate decline also will be of no benefit to millions of troubled homeowners who want to refinance their mortgages in states that have been hammered by the bursting of the housing bubble, including California, Florida, Arizona and Nevada, where housing prices have plunged by 30 percent to 40 percent in many markets.
Adjustable-rate mortgages requiring little or no down payments were wildly popular during 2005 and 2006 in the bubble states, and many homeowners in these states are now "under water," owing more on the mortgages than their houses are worth.
About 12 million U.S. homeowners are in that situation, said Mark Zandi of Moody's Economy.com. That's a big increase compared with the 6.6 million homeowners who owed more than their houses were worth at the end of last year. Only about 3 million homeowners were under water at the end of 2006, Mr. Zandi said.