The turmoil in the financial markets

Financial crisis tough on homebuyers, sellers
The turmoil in the financial markets has rates on a roller coaster. And with tighter lending standards, fewer people are able to secure financing.

By Melinda Fulmer, MSN Real Estate

The rapidly unfolding crisis in financial markets could make it harder for many buyers to get loans, and could make some types of loans more expensive, experts say.

The nation's credit crunch had started to show some small signs of relief recently, with the number of mortgage applications edging up on declining rates and a government bailout of Fannie Mae and Freddie Mac.

But that glimmer of hope was dashed this week as investors around the world watched the U.S. financial markets stumble badly: Lehman Brothers Holdings filed for bankruptcy protection; Wall Street icon Merrill Lynch agreed be acquired by Bank of America; the federal government agreed to bail out insurer AIG to the tune of $85 billion; and the Fed declined a rate cut.

The most recent news – Treasury Secretary Henry Paulson's proposal to establish a government entity to absorb lenders' bad debt – contributes to the confusion over what will happen in the housing market. "They haven't really addressed how that's going to affect the mortgage market," says Jon Eisen, a San Diego mortgage broker and certified financial planner.

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And analysts say there could be even further fallout: Lending standards could get even tighter and rates on nonconforming or jumbo loans could jump.

"The rules have changed so much," says Eisen. "Every few days I get new memos from lenders about how the standards are changing."

Roller-coaster rates
The spiral of bad news initially sent mortgage rates lower before pushing them up.

Rates on 30-year fixed conforming mortgages averaged 6.07% on Sept. 18, according to financial publisher HSH Associates, after dropping below 6% the previous week.

That's still a historically low rate, economists say, but increasingly fewer people actually qualify for it, because of weaker credit scores or low down-payment amounts.

"The ability to have a down payment matters more than ever … and purchasing at a price that gets under the conforming limit," says Susan Wachter, a real-estate professor at the University of Pennsylvania's Wharton School.

For those who do qualify, these conforming rates should remain relatively stable, says Holden Lewis, who covers the mortgage industry for Bankrate.com. He doesn't expect conforming 30-year loans to spike to 8%, for example, or drop considerably.

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