Mortgage rates are low. So are approval rates

NEW YORK (CNNMoney.com) -- Mortgage interest rates are already flirting with record lows and the Federal Reserve's move to buy up government debt will send those rates even lower. But it doesn't look like it will get any easier for borrowers - even those with good credit.

Bankrate.com reported Thursday that the average interest rate on a 30-year fixed mortgage fell to 5.29%, compared with 5.37% in the prior week. In January, rates fell as low as 5.28%.

This week's Bankrate.com data do not even reflect the Fed's Wednesday announcement that it will purchase $300 billion in long-term government debt.

"This is a big commitment made by the Fed," said Mike Larson, a real estate analyst for Weiss Research, "like going all in in poker. The Fed is buying anything and everything to drive down rates."

The 10-year Treasury yield is used to help calculate 10-year mortgage rates, so as the yield falls, the corresponding mortgage interest rate follows.

Larson said he would not be surprised to see mortgage rates drop into the 4.5% range soon. If they do, that would surpass the 4.7% loans available just after World War II, the cheapest mortgages in American history, according to Larson.

However, one expert cautioned that mortgage rates may not fall as quickly as Treasury yields.

"Mortgage interest rates no longer move in lockstep with Treasurys," said Keith Gumbinger of HSH Associates, a publisher of mortgage information. "A half-point drop in Treasury yields will not translate into a half-point drop in rates. But there will be a big downdraft on rates."

Even before the Fed's move, rates were low and many borrowers were trying to take advantage of them. Applications for mortgages jumped 21.2% last week compared with a week earlier, according to the Mortgage Bankers Association (MBA), with homeowners seeking to refinance their old, higher interest rate loans accounting for nearly 73% of all applicants.

Most people who apply for loans generally receive them, according to Gumbinger, who said the pull-through rate - the percentage of applicants whose loans are approved - has been running about 60%.

Still, that's significantly lower than the pull-through rate the MBA recorded during the height of the housing boom a time when lenders set the bar for mortgage borrowers very low. In 2005, for example, more than 66% of all applicants were approved. In 2003, nearly 79% got their loans.

It's not like borrowers back then were more qualified. They were not. Credit scores for those who actually receive mortgages have been on the rise during the past few years.

Borrowers with scores of 750 or above accounted for 38% of loans issued during the second quarter of 2008, compared with just 23% two years earlier, according to the MBA. Those with low credit scores of 650 or less represented only 15% of loans during the first three months of 2008, compared with 28% during the first quarter of 2006.

During the bubble years, many borrowers weren't asked to prove income or assets or demonstrate that they could afford to repay their loans. Indeed, in many cases, it was obvious that they could not. So, they were given low teaser rates they could manage for the first couple of years and, after that, the thinking was, they could refinance the loan and start the process over again.

The housing bust ended all that and the people applying for loans now are of much better credit quality. But underwriters are so tough today that they still reject four of every 10 loans.

"The underwriters are being so careful," said Steve Habetz, a mortgage broker based in Connecticut. "The minutia they're asking applicants for is amazing."

He had a couple with a 750 credit score looking to refinance a loan, which would leave the clients with a 60% loan-to-value ratio; in other words, an excellent credit risk.

"It took weeks to get approval," said Habetz. "They kept asking for more and more detail about his assets."

For example, the underwriters insisted on seeing the detailed records of all the transactions of the client's bank accounts, not just the summary sheets he first provided.

Underwriting standards are so stringent, according to Gumbinger, many potential mortgage borrowers don't even bother considering buying a home because of all the hoops they have to jump through. "Borrowers understand they have to be better qualified to get a loan now so they don't even bother to try," he said.

They must repair their credit or come up with bigger down payments if they want to buy a home.

Habetz said, "A lot of people are listening to the media and not even coming in any more. As busy as we are, we should be a lot busier."

The increased underwriter scrutiny has forced him to screen his clients much more diligently. He weeds out all but the most credit-worthy borrowers before they get to the application stage.

"It costs applicants $600 plus for an application fee and appraisal and you don't want them to incur that expense if they don't have a good chance of getting the loans," he said.

One recent client purchased a home a couple of years ago for $260,000, did some work on it and wanted to refinance his loan based on a home value of $275,000.

But a similar house across the street was on the market for $219,000, said Habetz. He explained to the client that, while his house might be nicer, he would never get an appraisal high enough to make the refinancing work. It would just be a waste of money to try to get a loan.

"I never did fill out an application for him," he said.