The U.S. House of Representatives voted Thursday to extend the first-time home buyers tax credit through 2010 as well as offer a credit to more seasoned home buyers. The vote was 403-to-12 and was widely expected to pass.

The current tax credit has been in effect since January as a piece of President Obama’s economic stimulus plan and has allowed first-time home buyers an $8,000 tax credit. It has been credited with jumpstarting the fallen national housing market, resulting in increases in existing homes over the past several months. Many feared that if it were allowed to expire as it was set to on December 1, that the real estate market would see a dramatic drop again.

Here’s how the extension works:

Buyers must be entered into a mortgage contract for a home purchase by midnight on April 30, 2010 and must close on their sale by midnight of June 30, 2010. First-time home buyers will still receive $8,000 in tax credits, while previous homeowners (specifically those who have owned their current homes for at least five years) will be allowed $6,500 in credits.

The purchased homes must be principal residences and may not exceed $800,000 in price. Those with an income of $145,000 or more ($245,000 if married filing jointly) are not eligible for the credit and those with incomes between $125,000 and $145,00 would receive a reduced credit.

Many hope that this extension will get things moving in not only the lower-priced end of housing but all in the middle-priced range as well. Lawrence Yun, chief economist for the National Association of Realtors believes that it might stem potential buyers’ fears about falling home prices.

“Once the consumer fear factor disappears, then housing can move into a sustainable recovery,’’ Yun said. “I think we will be there by the middle of next year.’’

I like how Patti Ketcham put it, a Tallahassee real estate firm owner, as quoted in the Boston Globe :“It’s huge. I think it’s going to have a big impact. I hope I’m right. Golly, I hope I’m right.”

The tables have really turned in the past couple years in terms of why American homeowners are refinancing. During the height of the housing boom, homeowners were borrowing against their equity like crazy, as their home values appeared to be headed quickly upward indefinitely.

Now, however, Americans are house poor and many are and have been at the mercy of high adjustable interest rates. In the most recent study from mortgage finance giant Freddie Mac, it looks like homeowners are overwhelmingly using refinance loans to lower those rates and cut their monthly payments.

Freddie Mac reported that in the third quarter of 2009, refinanced loans netted up to a total $3 billion in payment savings for the first year of the new mortgages for participating homeowners. One half of all those who refinanced conventional mortgages lowered their annual mortgage interest rate by 17 percent or more!

“Homeowners are benefiting from an extended period of very low interest rates. In the first nine months of 2009, interest rates on 30-year fixed-rate mortgages have averaged 5.1, the lowest such average in the 38-year history of Freddie Mac’s Primary Mortgage Market Survey,” noted Frank Nothaft, Freddie Mac vice president and chief economist. “At the beginning of the year, only borrowers who still had a solid equity cushion could take advantage of the low mortgage rates, but through the Homeownership Affordability Refinance Program that got underway in April, borrowers who have a loan owned by Freddie Mac or Fannie Mae can refinance that loan even if they have no home equity. As of August 31st, over 93,000 borrowers had taken advantage of this opportunity according to the Federal Housing Finance Agency, with the bulk of those occurring in July and August.”

And 64 percent of prime (good credit) borrowers who refinanced conventional loans in the third quarter retained the same principal balance or actually reduced it. That is the highest recorded percentage in six years. Only 36 percent of borrowers refinanced with “cash-out” loans. In total they pulled out $20 billion of home equity, the lowest amount in almost a decade.

Bottom line: If you can qualify, refinance now for payment savings. Interest rates are likely to rise starting sometime in 2010 and may not reach today’s lows for a long time to come.

Home buyers again saw mortgage rates rise this week alongside word that the economy is beginning to improve. According to the Wall Street Journal, rates for a 30-year home loan rose above 5 percent for the first time since September, rising to 5.03 percent. Rates for 15-year fixed rate and five and one-year adjustable rate loans also saw a rise in numbers. 15-year fixed rate mortgages climbed from 4.43 percent to 4.46 percent, while five-year adjustable rate loans rose from 4.42 percent to 4.40 percent. The rates for one-year adjustable rate mortgages are at 4.57 percent, up from 4.54 percent a week ago.

While the fact that the Federal Reserve felt confident enough to raise the rates is encouraging, the drop in mortgage applications and refinances put a damper on this news. According to the Washington Post, new home purchases dropped to a 402,000 annual pace, or 3.6 percent, in September. It was the first time since March that new home sales declined from month-to-month. The number of mortgage applications fell 5.2 percent in the third week of October, while lenders saw a 16 percent drop in applications from homeowners looking to refinance.

The news of the decline in mortgage applications for new home purchases is a bit discouraging for the housing industry. The $8,000 tax credit for first-time home buyers had helped provide an incentive to purchasers and drive new home purchases. However, with the tax credit ending and no definite word yet on an extension combined with the continuing rise in mortgage rates, the numbers may not improve for a while.

Rising home prices may also be playing a part in the declining number of applications. While an increase in home prices does signal growing buyer confidence and an economic upswing, it may be discouraging some buyers from purchasing a new home. Even as economists state they are beginning to see improvement in the economy, the public has not yet tended to agree, and rising home prices are likely to play a contributing factor in the decline of buyers applying for mortgage loans.

The mortgage rates for this week are still significantly below where they were a year ago, and are considered to be very low when compared to longer-term historical numbers. The low mortgage rates are a positive for the housing industry as buyers lock in their loans at lower rates. Unfortunately, with consumer confidence still not lining up with increasing economist confidence, the rise in rates may mean a dip in sales until confidence increases.

The Federal Housing Administration is set to implement a new set of rules November 2,  pertaining to mortgages made for condo-buyers. The new guidelines are aimed at protecting the FHA from mortgage fraud as well as minimize its risk of loss on condo foreclosures, but they will probably have the undesirable effect of preventing many buyers from entering the housing market.

Here’s what the FHA plans to change:

“Spot Approvals”  -  it used to be that the FHA would approve individual condo units for mortgages, without having to approve the entire condominium building/project. Now the whole thing will have to check out before someone can get an FHA-approved loan. The FHA said in a statement that the “processes have been streamlined, eliminating the need to approve units on a ’spot loan’ basis,” but lenders say that this could seriously reduce the available condo choices for buyers.

Maximums on FHA-Loan Holders in a Condo Project - In the past there was no limit, but now the FHA plans to only allow a maximum of 30 percent of condo owners to have the government-backed loans. This means that some buyers, especially those with lower credit scores and smaller down payments, may be kept out of certain condo projects because there are already too many of such homeowners in the building. Again, this will limit available condo options.

Requirements for Sold Units - Although there have been no limitations, the FHA will now require that half of the units in a condo project be sold before it will insure any loans for that building. While this protects the FHA against loss, it creates a catch-22. FHA buyers cannot buy until 50 percent of the project is sold, but it will be hard in many cases for condo builders to sell 50 percent of the units without FHA loan-backing for that first half. This requirement is still more lenient than that of Freddie Mac and Fannie Mae, which require that 70 percent of the project must be sold before they will make loans to new buyers.

Owner-Occupancy Rules - Now only 50 percent of a condo projects’ units must be owner-occupied, instead of the former 51 percent rule. This change doesn’t promise to make a huge difference in the condo market.

Overall, if these new rules go into effect on schedule, they will probably slow the housing market recovery by many months.

Today, the Obama administration announced two new programs to help a small segment of the U.S. housing industry get back on its feet, all with the promise that the taxpayer will not have to foot the bill.

HFAs Getting Help:
State and local housing finance agencies, also known as HFAs. They originate home loans for first-time homebuyers and lower-income buyers. They also provide refinance loans for rental properties. According to National Council of State Housing Agencies President Susan Dewey, the HFAs create between 100,000 and 200,000 new mortgages every year (this represents about 1 percent of the total mortgage market). They are also known for making very safe long-term loans with very low default rates. “Performance of HFA loans has materially outperformed most other loan types, especially when controlling for borrower profile,” according to a Treasury Department fact sheet. They create tax-exempt bonds based on their mortgage securities to pay for their operations.

Why HFAs Need Help:
Dewey says the HFAs have only issued $4 billion in bonds this year. In 2008 they issued $10 billion and in 2007 the total was $16 billion.

“With the market upheaval, we’ve been unable to sell new mortgage bonds for a year,” Bob Kucab, the executive director of the North Carolina Housing Finance Agency, said in a statement accompanying the release. “Despite all the ingenuity we can muster, we’re now helping only about a quarter as many first-time buyers as normal.”

The Obama/Treasury Plan:
1. The Treasury Department will buy HFA-backed securities issued by government controlled finance giants Freddie Mac and Fannie Mae.
2. Freddie and Fannie will provide the HFAs with a credit program to refinance the debt from their existing bonds at better rates and terms.

The hope is that these measures will provide the HFAs will the money needed to fund more new mortgages.

The Cost:
The HFAs will pay fees to participate in the new programs, which will supposedly cover the costs, but some reports have said that the initiative could cost taxpayers as much as $35 billion.

Treasury Assistant Secretary for Financial Institutions Michael Barr said there are some risks involved, but he didn’t expect taxpayers to take any losses for these programs.

“The expected cost to the government is zero,” Barr said of both programs. It seems unlikely, but perhaps…

Rates on 30-year fixed rate mortgages dropped below 5 percent last week and continued to fall this week, creating a dramatic stir in refinancing.

According to mortgage finance company Freddie Mac, the average rate on a 30-year FRM sank to 4.87 percent, excluding points, during the week ending Thursday, down from 4.94 percent. The 15-year FRM rate also dropped, falling to 4.33 percent from 4.36 percent, and the one-year adjustable rate mortgage averaged 4.53 percent, up from 4.49 percent.

There seems to be something special about long-term rates under 5 percent, as refinance activity has surged up 38 percent during the three weeks ending October 2 when rates were below that threshold. The same thing happened in May when rates were under 5 percent for several weeks. Some estimate that refinance requests rose by as much as 30 percent at that time.

It must be something about hearing that rates are near “record lows” that stirs homeowners to take the initiative to refinance into better loan terms and lower monthly payments.

“The wave of homeowners taking advantage of low rates by refinancing is a smart move on the individual level, and it’s possible these refinances could help the housing market in the long term,” said Stan Humphries, chief economist at Zillow.com, based in Seattle, Washington as quoted in a Reuters article. “If homeowners are getting out of risky mortgage products and into more traditional products, that could help stem future foreclosures marginally.”

The rates are still only helpful for those who qualify for refinances, and approximately one in four homeowners today are underwater in their mortgages, often keeping them from taking advantage of the falling rates.

Home purchases do not seem to be as affected by the drop in rates, as they only rose 13.2 percent in the latest week according to the Mortgage Bankers Association.

For the first time since May, interest rates on long-term mortgage loans dropped below 5 percent this week, reaching near-record lows, according to mortgage financier Freddie Mac. The average rate on a 30-year fixed rate mortgage (FRM) plunged to 4.94 percent, excluding points, for the week ending Thursday, from 5.04 percent last week. Rates have not been that low since the week ended May 28 when it was 4.91 percent. Last year at this time, the average rate was much higher at 6.10 percent.

Other rates also fell significantly with the average on a 15-year FRM dropping to 4.36 percent from 4.46 percent, and the average on a one-year adjustable rate mortgage (ARM) dipping to 4.49 percent from 4.52 percent.

Freddie Mac says this is great for the housing market.

“Low mortgage rates are helping to stabilize home sales,” said Frank Nothaft, Freddie Mac vice president and chief economist. “New home sales in August rose to the highest annualized pace since September 2008 and the inventory of unsold houses fell to the lowest level since February 1983. Although existing home sales fell somewhat in August, it was still the second strongest showing in 23 months.”

Apparently the low rates from the past week were not enough to entice borrowers to the mortgage table, though. The Mortgage Bankers Association reported Wednesday that refinance applications were down by 0.8 percent for the week and home purchase applications were down 6.2 percent.

Even though rates are phenomenally low, the problem may continue to be that many potential borrowers just don’t have the credit to qualify these days. Those who really need to refinance are often behind in their payments or even underwater in their loans and are unable to take advantage of the rates. Others, like many potential first-time home buyers, may not have the down payment money or credit scores to get into a low rate home loan right now. Still, rock bottom rates are probably the best thing for the market until unemployment and foreclosure numbers start to stabilize.

With all of the foreclosures and bad financial news one would think that there is nothing going on in the refinancing market segment right now. But, that is far from the truth. There are still some great reasons to refinance your mortgage. Doing so will deliver five advantages to you.

1. Low Rates
Rates are still at their lowest in a very long time. And, it appears that since the economy might be on an ‘upswing,’ the rates could increase very soon. Rates currently hover around 5% which makes finance charges a small part of a mortgage payment. There is another benefit of this: being able to afford a 15-year mortgage. This will allow you to pay off your loan sooner and build up equity quicker at the same time.

2. Replacing an ARM
Getting out of that adjustable rate mortgage is mandatory because of the increases in payments that they will bring or have brought in the last year or so. With budgets stretched thin, families can ill afford to have this happen right now. Those who were comfortable with their payments suddenly wake up to find that they have increased in such a manner as to prevent them from being able to make them.

3. Financing is More Plentiful Than You Might Think
There are still banks failing and being bailed out by the FDIC, but there are still many solvent and cash-heavy financial institutions like credit unions that would like a bigger piece of the action on mortgages. Not just any mortgages, though. They want good solid financing deals that are good for both the homeowner as well as themselves.

4. Affordable Payments
Using our refinancing calculator, you can see just how affordable your payments can be. When you compare the numbers from this calculator to your current figures, you will be able to see yourself with lower affordable payments which will provide breathing room in your budget.

5. Individual Attention and Advice
Since there are fewer buyers and homeowners financing houses right now, mortgage companies are not as busy and can afford to spend more time with customers and provide greater service that is needed to make sure that each customer gets the financing that they need. During the rush to finance sub-prime mortgages, it was difficult to get the attention that you needed to make sure that the details were being handled properly.

Not all news is bad right now: refinancing makes a lot of sense for many people.

It seems there can be no complete recovery of the housing market until the job market stabilizes. New data from Equifax, reported by Reuters news today, showed that the rate of mortgage delinquencies is climbing, and climbing fast.

According to the source, 7.58 percent of all U.S. mortgages were delinquent by 30 days or more in August, an increase from July’s 7.32 percent. This is the fourth straight month of rising delinquencies, and the current rate is up dramatically from a year earlier when it was 4.89 percent. Two years ago, in August 2007, the rate was only 3.44 percent.

Here’s a graph from the Mortgages Unzipped blog that shows the delinquency trend over the past few years. It is definitely on the quick rise.

Apparently there is a very high correlation between these recent figures and the rate of consumer bankruptcy filings. Bankruptcy filings rose by 32 percent in the past year according to Reuters.

Rising unemployment numbers are certainly to blame for both of these issues. And we haven’t seen the end of job losses so far. While unemployment rates have not been increasing as fast in the latest months, more jobs are still being cut than are being created. And as people continue to lose jobs, they will continue to be unable to meet their financial obligations.

What does this mean for the rest of the mortgage market? Home prices are likely to stay down across many regional markets until the delinquency rates (and consequently the foreclosure rates) calm down. But the good news is that mortgage interest rates remain near historic lows, so buying and refinancing are still very attractive for those who can qualify.

According to top state officials another wave of foreclosures is about to break across the country, this time in the form of resetting option ARM loans.

“Payment option ARMs are about to explode,” said Iowa Attorney General Tom Miller after the meeting. “That’s the next round of potential foreclosures in our country,” he said.

State Attorney Generals in a meeting Thursday with President Obama’s administration warned that a new round of foreclosures could destabilize the timidly recovering housing market.

Arizona Attorney General Terry Goddard offered raw figures on the plight of his state, saying that there are 128,000 option ARMS poised to reset through 2010, with many of them already starting to reset this month. “It’s the other shoe,” he told Reuters. “I can’t say it’s waiting to drop. It’s dropping now.” He also said that they “threaten a much greater hit to the consumer than the subprimes,” the original shock wave of foreclosures.

What are option ARMs? They are mortgage loans that provide borrowers with extremely low initial teaser rates and give borrowers the option to pay even less than the monthly interest on their loans for a certain period of time. This actually causes the loan balance to increase, creating negative equity or “underwater” loans. Once the interest rates reset, the new payments can be as much as 10 times higher than the initial payment, leaving many people unprepared for the huge jump and often resulting in default and foreclosure.

Here’s a graph from the consumerist.com, courtesy of Credit Suisse, that shows when and how big the option ARM hit will be. It looks like tens of billions of dollars worth of these loans will be resetting over the next two years. And odds are, many of these borrowers will not be able to afford the new, higher payments. Surfs up everybody!