Is the mortgage market “once bitten twice shy” ?

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Despite record low mortgage rates (4.5% fixed for 30 years) the applications for home purchases and refinance is down. In fact applications are the lowest in 14 years.

Yes there was a serious problem of unqualified home buyers, easy mortgages ,lax lending and above all the mysterious derivatives that put the US and world economy in a downward spiral that it is still struggling to come out of.

But the question is : why is everyone acting "once bitten twice shy"? The strangest one I heard was of an employed couple in Florida who want to refinance and the bank refuses to let them because their home value has declined 50% and the current loan is more than the value instead of the standard 80%  loan:value ratio that banking rules require.

Mortgage finance folks are getting lots of calls from prospective customers  but the rules are being followed  "without exception" resulting in genuine  consumers  backing off.

There needs to be rapid action right at the local level like getting the local banker to verify risk issues personally and take a call without fear of dire consequences if there is indeed a default. Other wise someone sitting on a less than market value (high interest) loan  in with no opportunity to refinance will be tempted to walk out of the loan -entirely. So far there is news of only the rich walking out of mortgages. Unless the mortgage market players figure out a way of being more responsive to the needs and situation of good ,honest, middle America  the default malaise might spread.

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