A joint effort by the Federal Reserve and the U.S. Treasury Department, announced Tuesday, has produced the latest in a string of government-funded bailout plans to jump start the economy.

“The financial markets are not working as we’d like them to work … and this is an effort to address that situation,” said Treasury Secretary Henry Paulson in a press conference.

The new package calls for an additional $800 billion dollars to be made available to indirectly help more businesses, consumers, and homeowners to get the loans they need.

Past financial “rescue” plans have not yet had the desired economic impact of increased lending as investors have stayed on the sidelines making it difficult for companies to sell mortgage loan debt and other consumer debts.

“This lack of affordable consumer credit undermines consumer spending and, as a result, weakens our economy,” Paulson said.

Speaking of the initial failure of other bailout programs, Paulson added, “I wish, and I know everybody wishes [for] one piece of legislation, and then magically, the credit markets would unfreeze,” he said. “That’s not the type of situation we’re dealing with.”

At least $200 billion of the allocated funds, via the Federal Reserve bank of New York, will be directed at providing more liquidity to securities-backed investors who buy up consumer debt like credit card balances, car and student loan debt.

The Fed also announced its decision to buy as much as $500 billion of Fannie Mae, Freddie Mac, and Ginnie Mae mortgage-backed securities (MBS). Additionally, it will purchase $100 billion in direct mortgage loans from the government-sponsored home loan giants.

According to the Fed, this plan will “reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.”

The money for these new pricey programs will be generated from not from taxpayer funds but from an increase in government reserves, or the creation of new money.

Federal Reserve Chairman Ben Bernanke has recently admitted he was wrong to assume that the effect of the subprime mortgage crisis would be limited.

“I and others were mistaken early on in saying that the subprime crisis would be contained,” Bernanke said in an article entitled “Anatomy of a Meltdown” in the December 1 issue of The New Yorker.

“The causal relationship between the housing problem and the broad financial system was very complex and difficult to predict,” he said.

The subprime crisis hit began in the summer of 2007 as adjustable rate mortgages made to subprime or bad credit borrowers started to reset at higher interest rates. Many of those homeowners were unprepared for the dramatic jump in their monthly payments and were forced into foreclosure.

As those losses started to scare off investors in the secondary mortgage market, liquidity for home loan lenders began to dry up, leaving them with little money to lend to new borrowers. Banks immediately  tightened up their credit standards, refusing to take on risky loans as they had been doing during the housing boom.

The result has meant that first-time home buyers and poor credit borrowers have had a very difficult time obtaining funding for home purchases and refinances, slowing the formerly bustling mortgage market to a halting pace.

The fallout from this slowdown has impacted even good credit home buyers and owners, restricting their home loan options and decreasing their property values as neighboring homes fall into foreclosures and subsequent disarray.

Wall Street has also felt the effects as many banks and lenders have filed for bankruptcy with the loss of capital from investors.

The Fed has reacted to the crisis by cutting their key interest rate in an attempt to stimulate more lending. It has also recently made plenty of short-term cash loans to struggling lending institutions in order to keep the supply of money in the market flowing. The impact of these controversial actions has not yet been determined but many fear that the taxpayer will end up footing the bill for all the Fed’s bailout activity.

Interest rates on U.S. mortgage loans fell for the third straight week as economic data showed weaker prospects for the future, according to mortgage giant Freddie Mac Thursday.

“Long- and short-term mortgage rates fell for the third consecutive week amid continuing signs of a slowing economy,” said Frank Nothaft, Freddie Mac vice president and chief economist. “Retail sales fell for the fourth straight month in October and consumer sentiment remained near a 28-year low in November.

“In fact, the Federal Reserve during its October 28-29 committee meeting lowered its economic growth forecasts for 2008 and 2009, according to its minutes released this week.”

In response to such disheartening news, home loan lenders lowered their rates on 30-year fixed rate mortgages to an average of 6.04 percent, during the week ended Nov. 20, excluding points, down from 6.14 the previous week and 6.20 percent one year ago.

The average interest rate on 15-year fixed rate loans dropped to 5.73 percent from 5.81 percent the week before. At this time last year the average rate was 5.83 percent.

Rates on one-year adjustable rate mortgages averaged 5.29 percent, a decrease from 5.33 percent a week earlier and from 5.42 percent the previous year.

Freddie Mac complies its survey of weekly interest rates from roughly half of all lenders in the country. It is a “stockholder-owned corporation established by Congress in 1970 to provide liquidity, stability and affordability to the nation’s residential mortgage markets,” although recent financial crises have forced the federal government to place the company into a conservatorship. This government control period is designed to get the company operating on a financially-sound basis again and to make sure that mortgage money remains available for qualified borrowers.

Mortgage giant Freddie Mac has released its monthly forecast, showing less confidence in the U.S. mortgage market now than it did last month. The forecast from the company’s Office of the Chief Economist lowered expectations on almost all aspects of the housing sector following a month of more economic turmoil.

Freddie Mac now believes that mortgage demand will not rebound until 2010. The forecast predicted that mortgage originations were likely to fall by 8 percent to $1.65 million in 2009 before expanding to $1.82 trillion the following year. In October, Freddie believed that mortgage originations would increase to $1.92 trillion in 2009 and grow to $2.04 trillion in 2010.

The forecast also showed lowered estimates of home sales in 2009. Freddie Mac had previously projected home sales hitting 4.86 million in 2008 and rising to 5.13 million next year, but new data suggest that while there may be more home sales this year, no more than 5 million sales are likely for 2009.

Similarly, home prices are now expected to suffer more next year as well. As of last month, Freddie Mac expected the Standard & Poor’s Case-Shiller national home price index to fall by 13 percent in 2008, by 5.1 percent in 2009, and by 2 percent in 2010. The new predictions are that the indexed prices will drop by 13.9 percent this year, by 7.8 percent next year, and still fall 2 percent in 2010.

Exacerbating the housing downturn will be rising interest rates. Freddie Mac forecasts that rates on 30-year fixed rate home loans will average 6.1 percent this year and grow to 6.3 percent over the next two years. Last month, the company predicted that interest rates would drop to 5.9 percent in 2009 before rising to 6.2 percent in 2010.

All of these predictions were fueled by weaker employment and economic data. Freddie Mac predicts that unemployment will swell to 7.5 percent in 2009 while the gross domestic product (GDP) will only grow by 1.3 percent during the same year.

The number of foreclosure filings increased again in the latest month, growing by 25 percent from October 2007, according Irvine, Ca.-based RealtyTrac.  Unfortunately this trend has been in place for some time and there seems to be no end in sight.

“October marks the 34th consecutive month where U.S. foreclosure activity has increased compared to the prior year,” said James J. Saccacio, chief executive officer of RealtyTrac.

There were 279,500 U.S. homes in some stage of the foreclosure process last month, up 5 percent from September figures. That accounts for one out of every 452 households across the country encountering a default notice, auction sales notice or a bank repossession.

“The really sobering reality for us is that despite these various state programs that are artificially keeping the numbers down, we are still up 25% from a year ago,” said Rick Sharga, senior vice president of RealtyTrac in reference to a new California law enacted in September.

The Golden State law calls for mortgage lenders to personally contact and negotiate with borrowers before beginning the foreclosure process. This law has delayed, but not permanently reduced, the number of foreclosures on the books.

The states with the highest rates of foreclosure were Nevada, Arizona, and Florida, according to RealtyTrac data.  Nevada had one foreclosure filling for every 74 homes in October, six times the national rate. Last month marks the 22nd month that the state has had the highest foreclosure rate in the country.

Arizona saw its foreclosure filings rise to 17,507, an 35 percent increase from September and a 176 percent jump during the past year. The foreclosure rate there is now one out of every 149 households.

Foreclosures in Florida grew to 54,324 in October, up 13 percent from the previous month and 80 percent from the same time a year ago. One out of every 157 properties is now in some stage of foreclosure in Florida.

As to when things will start to turn around, Sharga said, ““It took us the first half of the decade to get into this problem, so it is probably going to take a couple of years to get out.”

Mortgage giant Fannie Mae lost more than $29 billion in the third quarter of 2008, according to a report Monday, an immense increase from the the $2.3 billion it lost during the second quarter.

The mortgage finance company reported that it lost $21 billion in fees due to changes in how it uses tax credits and lost $9.2 billion in credit-related losses associated with defaulted mortgage loans.

Fannie Mae and competitor company Freddie Mac, were created by federal government many years ago to provide better liquidity in the mortgage markets and to guarantee home loans, making home-owning more affordable.

The two companies have grown to own or back $5 trillion of U.S. mortgages, and are almost the only companies large enough to bundle home loans for sale as mortgage-backed securities on the secondary money. Investment in those securities provide the money for further mortgage financing all over the country.

And while Freddie and Fannie have always been owned by share-holders, not the government, after reporting staggering losses in recent quarters, the Treasury Department took over both entities on Sept. 7 in order to prevent either company from going under and completely crippling the mortgage market.

Fannie Mae is now in a period of reorganization, being retooled to hold to tight lending standards and concentrate solely on providing liquidity for the bleeding mortgage sector. Yet things are not yet looking up financially for the company.

“If current trends in the housing and financial markets continue or worsen, and we have a significant net loss in the fourth quarter of 2008, we may a negative net worth as of December 31, 2008,” the Fannie statement reported. “If this were to occur we would be required to obtain funding from Treasury.”

A volatile economy continued to affect the U.S. mortgage market this week, causing mortgage demand and interest rates to plummet.

According to the Mortgage Bankers Association’s index, home loan application volume decreased by 20.3 percent to a a seasonally adjusted index reading of 379.9 during the week ended Oct. 31.

Both refinance and home purchase loan requests were lower in the latest week, with the MBA’s refinance index falling 27.8 percent o 1075.4 and the purchase index sinking 13.9 percent to 260.9.

Refinances made up only 42.9 percent of all mortgage requests, compared with 46.9 percent the previous week.

During the roughly the same time, interest rates on long and short term home loans fell as well, according to Freddie Mac Thursday.

“Mortgage rates fell this week amid new indications of a pullback in consumer spending and a weaker jobs market,” said Freddie Mac vice president and chief economist Frank Nothaft.

The average rate on a 30-year fixed rate mortgage decreased to 6.20 percent, excluding fees, from 6.46 percent the week before. One year ago, the average rate was 6.24 percent.

Rates on 15-year fixed rate loans dropped to 5.88 percent from 6.19 percent. At this time last year, 15-year mortgages averaged a rate of 5.90.

One-year adjustable rate mortgages carried an average rate of 5.25 percent, down from 5.38 percent one week earlier. Last year, the average rate was 5.50 percent.

According to Nothaft, tighter lending standards are having the biggest impact on demand and rates.

“With the economy contracting and experiencing record home foreclosures, lenders tightened their credit standards further, according to the October Federal Reserve Senior Loan Officer survey,” he said. “Approximately 70 percent of banks raised their lending standards for prime mortgages and about 90 percent of banks that offer nontraditional mortgages did so as well.”

In its latest quarterly senior loan officers survey, the Federal Reserve reported that banks in record numbers are holding borrowers to much stricter standards because of the slowing economy.

“In the current survey, large net fractions of domestic institutions reported having continued to tighten their lending standards and terms on all major loan categories over the previous three months,” the Fed said Monday.

The survey, which included 55 domestic and 21 foreign  banks, found that:

• 85 percent of banks had tightened credit standards for commercial and industrial loans made to large or mid-size companies. Only 60 percent had done so during the previous quarter.
• 87 percent of surveyed banks reported requiring stricter requirements for commercial real estate mortgages. At the same time, 77 percent of banks reported the demand for these loans had dramatically decreased.
• 71 percent of banks had tightened their lending standards on residential prime loans, and 89 percent of banks made it more difficult to qualify for “nontraditional” home loans. Few respondents of the survey were still offering subprime loans, but those that did had all continued to require more of their poor credit applicants.
• 78 percent of banks restricted approval for home equity lines of credit and 59 percent upped their standards for approving new credit card requests.
• 20 percent of respondents reduced lines of credit for prime borrowers while 60 percent reduced them for their less credit worthy customers.

The dramatic choke hold on commercial and residential financing is due in large part to losses and fears that banks have experienced as the global economy has withered during in the past two years.

“Roughly 75 percent of foreign respondents and about 40 percent of domestic respondents noted that a deterioration in their bank’s current or expected capital position had contributed to the move toward more stringent lending policies over the past three months,” the Fed concluded.

It added, “ Almost all domestic and foreign respondents pointed to a less favorable or more uncertain economic outlook as a reason for tightening their lending standards.”