The state agency that provides lower-interest loans to first-time home buyers has been forced to raise its interest rates twice in recent weeks because of the upheaval on Wall Street, making it harder for some new buyers to qualify for mortgages.

Since Oct. 1, MaineHousing has offered a no-points interest rate of 6.35 percent, up from 5.5 percent a month earlier. On Friday, KeyBank offered a similar loan for 6.25 percent.

It’s an unusual situation, since MaineHousing aims for a rate that is a full percentage point lower than can be found on the commercial market. MaineHousing usually can offer better rates because it is financed by tax-exempt bonds.

But agency officials said they have had to raise interest rates because the financial crisis has frozen the municipal bond market. MaineHousing’s home-buying program is 90 percent funded through bond sales.

“We would be underwater if we issued bonds at 6 or 8 percent and loaned it out at 5.45 percent,” said MaineHousing Director Dale McCormick.

The higher interest rate is affecting Lynn Avigo, a clinical team leader at a drug treatment facility who has put earnest money down on a South Portland condominium. On Friday, she was poised to lock in a MaineHousing no-point loan, with down payment assistance, at 6.65 percent.

“When I first started looking, the interest rate was 5.85 percent,” Avigo said. “It did discourage me, I’ll be honest.”

More people than ever are turning to state housing agencies for loans because of the crash of the subprime market nationwide and the evaporation of those lenders, which catered to low- or moderate-income clients. Subprime mortgages are loans given to people who are perceived as having a higher danger of default because they have limited experience with credit, a history of bankruptcy or other risk factors.

Traditional lenders, meanwhile, have tightened their standards by requiring higher credit scores or larger down payments.

“Today, everything is very, very conservative, and it’s gotten worse with the credit crisis. There are a lot more home buyers that don’t qualify for traditional loans,” said Jim Stretz, senior vice president of George K. Baum & Co., an investment banking firm in Denver that works closely with state housing agencies.

State housing authorities are “critical” in this environment, he said.

Rising demand

Demand for MaineHousing loans has been at an all-time high since the collapse of the subprime mortgage business earlier this year, McCormick said.

“We’ve been loaning out $20 million a month. That’s higher than it has ever been,” she said.

Gail McBride, director of MaineHousing’s home ownership department, said MaineHousing is on track to do about 30 percent more first-time home-buyer loans in 2008 than it did last year.

“It’s been a struggle for us the last five years … the competition was just fierce,” she said. “Well, all those folks are gone now, and it’s been a love fest ever since. People love us again, and they want to do our program.”

In fact, just as the markets were starting their slide in late September, McBride said she was doing paperwork when she realized the agency had hit a high-water mark of providing more than 100 loans in a two-week period.

“We were excited, and I went skipping up to our treasurer to tell him the good news, and he looked at me and said, ‘Gosh, I’m not sure that I have the money,'” McBride said. “Well, we’ve never had a funding issue, and this was like cold water in the face. I realized that [the financial meltdown on Wall Street] had really hit us, too.”

The agency moved quickly to alert lenders that starting Oct. 1, it not only would raise interest rates, but also would switch to a daily-rate valuation instead of setting interest rates that were good for 30 days. Zero-point rates that had held steady at 5.55 percent since July went to 5.95 percent on Sept. 25, then 6.35 percent on Oct. 1. They remained at 6.35 percent over the weekend.

The increase from 5.55 percent to 6.35 percent means a monthly payment on a $150,000 loan would go up $76.95, from $856.40 to $933.35. That could be enough to deter some buyers and make others ineligible.

“As a department, we felt that maybe we had to slow down by raising the interest rate. We put the brakes on a little bit,” McBride said. The move worked, she said, and the problem of high demand and scarce funding has “just kind of taken care of itself.”

Applications, she noted, have slowed from about nine a day to about three a day since the rates went up Oct. 1.

Living the headlines

McCormick said the Florida housing authority raised rates to 6.75 percent, and it didn’t even see a slowdown.

“We are an organization that is living the headlines,” McCormick said. “The problem is, we eventually need to sell bonds and there is not much of a bond market.”

Other states are facing similar funding issues. In early October, Wisconsin shut down its home-buyer loan program because of the difficulties of selling bonds.

MaineHousing eased its financial situation somewhat last week, with a retail-only bond sale to local Mainers that raised $37.7 million. McCormick praised the results of the “wildly successful” retail bond sale. “We can keep our first-time home-buyer program going,” he said.

Despite the bond sale, MaineHousing interest rates are likely to hold steady at current rates, McBride said.

And while McBride said agency officials never had to seriously consider ending its lending program like Wisconsin, managers did discuss the possibility.

“With the staff, I said, let’s just talk about the ‘what if,'” she said. “It was a huge relief to see the retail bond sale.”

But MaineHousing’s higher interest rate has not deterred Lisa and Jim Beeler, who are in the process of applying for a MaineHousing loan. They haven’t locked in a rate yet and have watched the interest rate creep up since they started the home-buying process.

Now living in a subsidized apartment and out of work because of disabilities, the couple realized earlier this year that their rent was higher than a house payment would be using a low-interest loan from Maine’s state housing authority.

“Without this program, we would have been totally lost,” Lisa Beeler said of MaineHousing. “I don’t care that it’s over 6 percent. As long as we can make the mortgage payment, we’re going to do it. A home is freedom, as far as I’m concerned.”