If you were hoping for a dramatic recovery of the U.S. housing market this year, you might be in for a disappointment, according to statements from a Federal Reserve official.

“I don’t think we will see any further deterioration in 2010, but you probably won’t see a lot of rapid improvement either. You’ll just hang around at these low levels,” said. St. Louis Federal Reserve Bank President James Bullard in an interview with Reuters.

But neither does he expect interest rates to rise much, which could be good.

Of the market’s transition when the Fed ends its $1.25 trillion bailout program of mortgage-backed securities purchased he said, “I think it will be seamless.” Perhaps a little optimistic, based on what the actual market analysts are saying, but time will tell.

In his interview he did seem to be pretty upset about the latest budget proposal from the Obama Administration in its lack of housing market measures.

“Fixing the U.S. housing market should be one of the main focuses of regulatory reform legislation, and instead we are kicking the can,” Bullard ranted. “That is the wrong approach to regulatory reform. It should be a key pillar. [Fixing] the situation in the mortgage markets … is an issue that the nation has not faced up to.”

Specifically he was referring to the Administration’s avoidance of the whole Freddie Mac and Fannie Mae issue. The government has been promising to give details about its plans for the two government-sponsored entities that guarantee about half of all U.S. loans. They were taken over by the government in September 2008 and many people are starting to demand some answers about the future of these mortgage giants.

The White House budget only said that it would “provide updates on considerations for longer-term reform…as appropriate.” Pretty vague language about the status of two of the most important parts of the housing market!

The battered real estate market has finally made its way all the way to the top. The Mortgage Bankers Association recently had to sell its 10-story headquarters building in Washington D.C. While they are being very mum about the whole deal, we do know that the building was sold to CoStar Group Inc. for $41.3 million. We also know that the MBA paid $79 million for the property in 2007 and financed the purchase with a $75 million loan from a group of banks headed up by PNC Financial Services Group Inc.

So, did Association get a “mortgage modification”? Are they going to pay back the rest of the loan money. “We’re not going to discuss the financing,” is all that CEO John Courson would say on Saturday, but it sure has the look of a dramatic short sale, a case of the MBA not meeting its complete financial obligations.

Here’s what the New York Times had to say:

In an interview late last year, Mr. Courson said he believed mortgage borrowers should keep paying their loans even if that no longer seemed to be in their economic interest. He said paying off a mortgage isn’t only a matter of personal interest. Defaults hurt neighborhoods by lowering property values, Mr. Courson said. “What about the message they will send to their family and their kids and their friends?” he asked.

Take a look at this scenario and see how it is any different from what homeowners across the country have been doing. Again from the NY Times:

When the MBA announced the purchase of the building in early 2007, the trade group’s president at the time, Jonathan Kempner, said: “We have come to the inescapable conclusion that owning our own building was the smartest long-term investment for the association.” In October 2009, however, the MBA informed its members that it had put the building up for sale. At that time, the MBA said that continued ownership of the building, which was financed with $75 million of variable-rate debt, would be “economically imprudent.”

You gotta love the not-so-subtle hypocrisy!

The State Foreclosure Prevention Group issued a report this week that predicts the foreclosure rate to rise steadily through 2010. The group was founded in 2007, has released three previous reports and consists of 12 state attorney generals, bank regulators and bank supervisors.

Washington State’s Attorney General Rob McKenna (one of the 12 in the group) said, “despite significant state and federal efforts to assist homeowners, more foreclosures are predicted for this year than occurred in 2009.” He went on to say, “programs to help prevent foreclosure are jammed up, while 60 percent of delinquent borrowers aren’t getting any help. Servicers must do more.”

The report shows flaws in current efforts to assist homeowners. The group found that the Home Affordable Modification Program has helped to slightly slow the foreclosure rate, but that 6 out of 10 homeowners in crisis are not getting any kind of help. To further complicate matters, homeowners who are in the process of loan modification are having to wait six months or more to complete the loan modification process. Finally, most loan modifications reduce the payment but not the principal. This is still leaving most homeowners with negative equity and a huge likelihood of default sometime down the road.

The group did make several recommendations that could help to significantly increase program success. The first recommendation is that as soon as a homeowner is involved in loss-mitigation, foreclosure on their home needs to be suspended. Many homeowners who have been trying to enter into a loan modification program have lost their homes during the modification process.

Prioritizing principal reductions, especially in areas where homes have lost considerable value was also recommended. Giving extra assistance to out of work homeowners was also a top priority. Many homes in foreclosure are due to unemployment and loss of wages. Also recommended was help to homeowners who were in ARM mortgages as these loans are defaulting at higher rates than fixed rate mortgages. Changing payment terms on these loans could greatly reduce the foreclosure rates.

A reduction in paperwork for homeowners entering into modifications programs was also suggested. This has been part of the reason for the backlog of homeowners who are waiting.

Finally, states were also encouraged to get the word out. Expanding counseling programs to homeowners was recommended to help keep mortgage holders from missing an opportunity that may help them prevent going into foreclosure.

The latest quarterly survey released Monday from the Federal Reserve found that most banks have stopped tightening their lending standards on most loans, but they have not loosened their requirements either, as they sit in a holding pattern until the economy changes.

The survey, which included feedback from senior loan officers from 55 domestic banks and 23 foreign banks doing business in the U.S., reported that after nine consecutive quarters of tighter lending standards, things may be starting to look up for the credit market.

Banks “have yet to unwind the considerable tightening that has occurred over the past two years,” the Fed said. This tightening has included requiring higher credit scores, charging higher interest rates and fees, and demanding larger down payments. About 17 percent of the banks continued to tighten their lending standards on prime loans, while 30 percent tightened their standards on non-traditional mortgages.

The Fed survey also found that there was less demand for mortgage loans during the last quarter of 2009. In terms of the actual numbers, 29 percent of lenders saw a decrease in demand for prime mortgages, while 35 percent of banks saw a decrease in non-traditional home loan demand.

So, if you are looking to get a new mortgage soon, interest rates will likely stay low for a while as the Fed voted to keep the federal funds rate in the zero to 0.25 percent range at its latest meeting, and will continue to buy up toxic mortgage-backed securities through March. As long as you can qualify at the current standards you shouldn’t really have to worry about being disqualified during the middle of the process now. At least that’s what the Fed is reporting.

At the Federal Reserve’s latest meeting, it decided to hold its target rate at the rock bottom range of zero to 0.25 percent. That’s good news for interest rates. But it also announced its intentions to stop purchases of mortgage-backed securities as planned by the end of March 2010. That spells disaster for rates, right? Well, not necessarily, according to more and more analysts these days.

Some are afraid that the Fed’s pullout could mean that there will be very few buyers for MBS, resulting in higher mortgage interest rates to adjust for the lower demand for mortgages bundled as securities. In fact, 6 percent is a number that has commonly been thrown around as a prediction for rates this year. A rise to 6 percent from the current average of 5 percent could severely traumatize the still weak housing market.

Yet there may still be reason to hope that rates will remain low. Even if the Fed does exit the scene as planned, it will still hold $1.25 trillion of MBS in its portfolio. That means it is still keeping a ton of bad mortgages off the books of lenders, allowing for greater capital and liquidity for new mortgage loans. And there is certainly a common conception that if things go sour in the market again, the Fed will be right there to jump back in and bolster the underpinnings.

Plus, yields on mortgage-backed securities have seemed to pick up a bit in the past year, making them a slightly better option for investors in terms of return compared to things like corporate debt that have not been seeing rising yields. And the MBS are backed by the U.S. government, removing a lot of the risk.

To add proof to the theory that interest rates might stay low, even as the Fed has started to reduce its number of weekly MBS purchases, the spread between MBS yields and Treasury yields has narrowed. That spread determines what rates mortgage borrowers will pay and the smaller the spread the lower the rates will be.

So no need to start proclaiming more gloom and doom already!

Mortgage applications took a steep downward turn over the last week, falling 10.9 percent. While both new home applications and refinancing applications were down, the quick fall can be attributed to the sharp decrease in refinancing applications. Last week refinancing applications made up only 67.6 percent of total applications, which was down from 71.7 percent from the week prior.

In a statement by the MBA’s vice president of research and economics, Michael Fretantoni said, “refinance activity fell substantially last week. Although rates remain low, there appears to be a smaller pool of borrowers who are willing and able to refinance at today’s rates.”

2009 saw a sharp increase in refinance applications with interest rates at record lows. Even though interest rates have been slowly on the rise, they are still lower than they were a year ago. It appears that homeowners knew the rates would be heading up and those who were interested have already gone through the refinancing process.

Last week’s figures show 15-year fixed rate mortgages at 4.34 percent, up just slightly from the week before figure of 4.33 percent. The 30-year fixed rate came in at 5.02 percent, up from 5 percent the week before. For several months in 2009 interest rates were below 5 percent, showing an all-time low last March when the 30-year fixed rate was 4.61 percent.

In a still struggling economy and housing market, the outlook for continued low rates looks bleak. Rates are not expected to drop anytime soon and in fact are predicted to continue to rise throughout 2010. At the end of March the Federal Reserve is slated to stop buying mortgage related securities which will inevitably send rates upward.

Many economists have been speculating that the temporary first-time homebuyers tax credit has been artificially propping up the U.S. housing market, and now it is speculation no more. It is the truth as evidenced by the latest data from the National Association of Realtors.

Home contracts needed to be closed before December 1st for buyers to capitalize on the original $8,000 tax credit, and not surprisingly existing home sales dropped off a whopping 16.7 percent in December from the previous month, falling from a seasonally adjusted annual rate of 6.45 million units to 5.45 million.

While it is true that the December pace is 15 percent higher than the figure from one year earlier, it is still a very strong indicator that without the tax credit and the deadline, sales would have been much more lackluster in the last quarter of 2009.

Lawrence Yun, NAR chief economist on the drop in sales:

“It’s significant that home sales remain above year-ago levels, but the market is going through a period of swings driven by the tax credit. We’ll likely have another surge in the spring as home buyers take advantage of the extended and expanded tax credit. By early summer the overall market should benefit from more balanced inventory, and sales are on track to rise again in 2010. However, the job market remains a concern and could dampen the housing recovery – job creation is key to a continued recovery in the second half of the year.”

So in order for the housing market to truly find its equilibrium again the overall economy is going to have to pick up; it cannot be fixed with a few temporary carrots from the government.

A piece of good news is that the national median home price rose to $178,300 in December, up from both the previous month’s price of $172,600 and the previous year’s price. This represents the first year-over-year price gain in over two years.

Barney Frank, a Democratic Congressional Representative from Massachusetts, believes the U.S. mortgage system needs to be rebuilt from the ground up, which means getting rid of the mortgage finance giants Freddie Mac and Fannie Mae.

“The remedy here is…as I believe this committee will be recommending, abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance,” said Frank (who is the chairman of the House Financial Services Committee).

His proposal is highly unlikely, however, as Fannie and Freddie back about half of the mortgage loans in the country. It would be nearly impossible to eliminate those entities without destroying the mortgage market again.

Something should change with Freddie and Fannie in the future, though, even if they aren’t abolished. Both companies had previously been government-backed corporations, but were taken over by the government in September 2008 when both faced collapse from loan losses. Some say they should be permanently converted into government agencies, while others advocate shrinking their loan volume and returning them to the private sector.

The Obama administration has been wishy-washy on its plans for Freddie and Fannie. Treasury Secretary Timothy Geithner used vague language about the future of the companies in a recent PBS interview. He implied nothing new will happen this year.

“It’s just a complicated thing to get right,” he said. “But we are completely supportive and agree completely with the need to make sure that we take a cold, hard look at what the future of those institutions should be in our country.”

Be prepared for long-term mortgage interest rates to move roughly one percentage point higher this year, according to residential mortgage insurance provider PMI Group.

PMI’s  2010 forecast calls for a gradual increase in rates on 30-year fixed rate loans from their current position around 5 percent to 6 percent. It also predicts that existing home sales will rise by 7.7 percent this year and new home sales will jump up 35.5 percent. Prices are expected to fall by roughly 5 percent during the first quarter of 2010 due to an overabundance of houses on the market. Yet if all goes as predicted, PMI believes that prices will reach their 2009 average by the end of the year.

“We expect a decline in home sales over the next several months,” the PMI report said. “With the new credit and continued expansion of the economy — especially as the job market begins to expand — home sales should begin to grow again within a few months.”

All of these predictions are subject to revision if the Federal Reserve decides to start up its mortgage-backed securities purchases program again, which it might do later this year if the mortgage market tanks when the initial program ends in March.

Another important factor is whether or not the federal government decides to renew the current homebuyer’s tax credit set to expire in June this year. The first-time homebuyer’s $8,000 tax credit in 2009 helped sales surge through November and it has been extended and expanded since then, but sales could drop off again after the spring if it is not renewed.

All in all, the PMI predictions seem fairly safe, especially since they are very close to the Federal Reserve’s own forecast for the mortgage market this year.

Incredibly high rates of foreclosure across the nation have been crippling the U.S. housing market for the past year, and both the current and previous Administrations have tried to stem the tide of these defaulting mortgages without much success. Under President Obama, the Home Affordable Modification Program has asked mortgage servicers to pretty please modify the loans of struggling homeowners so they can keep their houses. So far, though, the initiative has been largely ineffective.

As of December 2009, there were 853,696 borrowers receiving modifications, approximately 25 percent of all eligible homeowners. And while the number of those whose trial modifications have been made permanent (with lower payments or reduced interest rates) more than doubled in the latest month (from 31,382 in November to 66,465 in December), it simply won’t be enough.

“It’s marginal progress,” said Washington, D.C.-based mortgage industry consultant Howard Glaser in a Reuters article. “It’s helping the borrowers who have received the modifications, but systemically, the program is insignificant. With the wave of foreclosures ahead, it’s kind of like fighting a forest fire with a squirt gun.”

And there is plenty more fuel for the fire on its way. Foreclosure data tracking company RealtyTrac recently released figures showing that foreclosure filings increased 21 percent in 2009 to 2.82 million. It predicts that there will be 3 million in 2010. As the company’s CEO James Saccacio says, in the long term “a massive supply of delinquent loans continues to loom over the housing market.”

So what’s to be done? The American government has bailed out many of the country’s major mortgage lenders and in return it expects them to feel morally obligated to help out the American people when it comes to foreclosures. So far, most banks are not demonstrating any such debt of gratitude. And without compulsory means, I don’t think it’s likely that we’ll see much of a change in the Home Affordable Modification Program numbers. And who knows? Maybe we shouldn’t hope to. It seems the new trend of thinking for some analysts is that massive foreclosures are the only way to get the housing market back to equilibrium, in the best interest of both homeowners and lenders. I don’t know if that’s true, but I still don’t think the government can or will stop the coming wave of 3 million foreclosures this year.