Mortgage rates, cost of living rise and lenders apply stricter guidelines

Every time you fill the gas tank, you get a lesson in why mortgage rates are rising.

Mortgage rates went up this week because prices for fuel and food keep moving higher and higher.

The fear is that prices for everything else will get kicked upward, too. In reaction to the inflation prospects, mortgage rates crept higher every workday in the last week.

The benchmark 30-year fixed-rate mortgage rose 18 basis points, to 6.2 percent, according to the Bankrate.com national survey of large lenders.

A basis point is one-hundredth of 1 percentage point.

The mortgages in this week's survey had an average total of 0.47 discount and origination points.

One year ago, the mortgage index was 6.47 percent; four weeks ago, it was 6.16 percent.

The benchmark 15-year fixed-rate mortgage rose 17 basis points, to 5.8 percent.

The benchmark 5/1 adjustable-rate mortgage rose 15 basis points, to 5.86 percent.

The 30-year fixed jumbo rose 9 basis points, to 7.38 percent.

Regardless of what happens to rates week in and week out, the mortgage industry has been steadily getting stricter, like a mother who realizes she's been too lenient with her teenager.

"They've gone so much to the opposite," says Bob Moulton, president of Americana Mortgage of Manhasset, N.Y. "Two years ago, they put a mirror under your nose and if there was fog, you got approved. Now they give you a full medical exam."

Fewer loan approvals?

Fannie Mae breaks out a new set of surgical gloves at the beginning of June, when the mortgage giant rolls out the latest version of its Desktop Underwriter software, commonly known as DU.

When the loan officer enters your financial information into the computer, there's a good chance that the machine is running DU.

The current version is called DU 5.7, but over the weekend, everyone will be upgraded to version 7.0.

That's right -- Fannie Mae skipped version 6 and went straight to 7.

Normally, you don't care what version software the loan officer uses -- Word 2000 is just as good as Word 2003, as far as you're concerned. But Desktop Underwriter is different. It's being upgraded to make shrewder lending decisions. DU 7.0 will say "yes" to fewer mortgage applications, and "maybe" to more. Then "maybe" sometimes will turn into "no."

Fannie's Chief Financial Officer Stephen Swad told investors this month that "we have significantly tightened underwriting and eligibility standards."

That trend continues with DU 7.0, which will make a lot of small changes that could add up to something substantial. Or, as Fannie phrased it in a notice to loan officers and brokers, "DU Version 7.0 will include a comprehensive update to DU's credit risk assessment" that will result in fewer loan approvals.

The new Desktop Underwriter will be more skeptical of borrowers who make down payments of less than 20 percent. Fannie will assume that you're not less of a default risk just because your loan has mortgage insurance.

Stop fraud

Other changes are intended to deter fraud.

For example, during the boom times, brokers were known to submit a borrower's application repeatedly, fudging the debt and income numbers each time, until Desktop Underwriter granted an approval.

DU 7.0 is believed to limit the number of times that the financial figures on an application can be changed; after that, the application is locked out, similar to the way an ATM will reject your card if you enter the wrong PIN multiple times.