Average interest rates on long-term U.S. home loans increased by the fastest pace in over twenty years during the latest week, according to mortgage giant Freddie Mac Thursday.

The company reported that 30-year fixed-rate mortgages carried an average rate of 6.46 percent, excluding fees during the week ended Oct. 16, a growth of 52 basis points from 5.94 percent the week before. That represents the largest weekly increase since the middle of April 1987. The current rate is even up from last year at this time when the rate was 6.40 percent.

The average rate on 15-year fixed rate loans rose to 6.14 percent during the previous week, from 5.63 percent. One year ago, the average was 6.08 percent.

One-year adjustable rate mortgages (ARMs) saw little change, however, as the average rate inched up to 5.16 percent from 5.15 percent a week earlier. Last year, the average rate was 5.76 percent.

“Interest rates for 30-year fixed-rate mortgages rose this week to an 8-week high,” said Frank Nothaft, Freddie Mac vice president and chief economist. “ARM rates, which tend to be based on shorter-term benchmarks, showed smaller gains in part due to the Federal Reserve’s October 8 inter-meeting rate cut in the overnight lending rate.

“Recent economic reports suggest the economy is still slowing. For instance, retail sales fell for the third consecutive month by 1.2 percent in September. In addition, in its latest Beige Book, released October 15th, the Federal Reserve indicated that economic activity weakened in September across all twelve Federal Reserve Districts and that several Districts also noted that their contacts had become more pessimistic about the economic outlook.”

On a regional level, average rates on 30-year mortgages were highest in the Southeast at 6.51 percent, excluding fees, and lowest in the West at 6.37 percent.

The number of U.S. homeowners that are “upside down” in their mortgages has quadrupled in the past two years, according to a recent report from Moody’s Economy.com.

Of the 75.5 million homeowners across the nation, about 12 million of them now owe more on their mortgages than their homes are worth, a situation that is also known as negative amortization. That means that roughly 12 percent, or one in six, of all homeowners have a mortgage balance greater than the value of their property.

By comparison, only 4 percent of borrowers were upside down in their mortgages in 2006 and 6 percent had negative equity by 2007.

And among those who bought a home in the past five years, the distinction is even more pronounced; approximately 29 percent in that category are “under water” on their home loans, according to the real estate website Zillow.com. This statistic is likely due to the fact that home prices reached their highest point during the past five years and mortgage lending standards were also at their loosest.

Home prices have made a steady decline since their peak in mid-2006, falling 13 percent to the current national median price of $203,000. That represents a more affordable price-to-income ratio, at 1.9 times the average pre-tax income, compared with prices that were 1.87 times the average income during the period of 1985 to 2000.

And while the number of people in mortgages with negative amortization is growing, the majority of homeowners, about 64 million, still have some equity in their home, with more than 24 million owning their homes completely, with no remaining mortgage balance.

Still, defaults and foreclosures are on the rise, and it can  be very difficult for those who have no equity and are way behind on their payments to hold on to their homes. The foreclosure crisis may continue to deepen as struggling homeowners face falling home values and fewer available mortgage lending resources.

As financial markets around the globe seized in turmoil Wednesday, the Federal Reserve along with five other central banks made emergency cuts to their target interest rates by a half point.

“Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months,” the Fed said in its Wednesday night statement. “Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation.”

In an unprecedented and concerted effort, the Fed joined with the European Central Bank, the Bank of England, the Swiss National Bank and the Swedish Bank in trimming back already low rates to stimulate more positive economic activity and provide greater liquidity to the parched markets.

The U.S. federal funds rate now stands at 1.5 percent, its lowest level in more than four years.

The worldwide slash of interest rates did little to bolster consumer confidence however, as the Dow took another roller coaster ride on Thursday, closing down 678.91 points at 8,579.19. The NASDAQ also fell, dropping to 1,645.

Yet Olivier Bernard of the International Monetary Fund explained the Banks’ decision was primarily designed to head off deeper crisis, not serve as a “wonder drug” for the global economy. “The crucial role of both financial and macro economic policies at this juncture: it is clearly too late for responses to avoid the slowdown but they can be used to head off the risk of even more dire outcomes.”

The new bailout package approved Friday by Congress and President George W. Bush will only help in the short-run, not permanently cure the foreclosure crisis that is at the heart of the financial sector meltdown, according to the Center for Responsible Lending (CRL) Monday.

The bailout bill, designed to allow the federal government to buy up $700 billion of bad loans from major mortgage bankers, also provides for government resources to “implement a plan that seeks to maximize assistance for homeowners” once it acquires those soured home loans. Yet those at the CRL believe the bill’s language is not strong enough or specific enough to stem the tide of raging foreclosures.

“Any plan that fails to stop foreclosures will ultimately fail to fix the crisis,” said Michael Calhoun, president of CRL. “Wall Street firms and banks caused a massive foreclosure crisis in this country, and this bailout provides no meaningful way to end it. It doesn’t stop the epidemic of foreclosures that will continue to drag down property values for everyone.”

It is estimated that more than 6.5 million homeowners will lose their homes to foreclosure in the next few years. The CRL says that roughly 40 million homeowners in surrounding neighborhoods will also be affected as their property values will be negatively influenced by those vacant houses falling into disrepair.

Steven Adamske, spokesman for the House Financial Services Committee, however, says the new bill will make it easier for the government to stop foreclosures, especially when lenders are uncooperative. “If servicers are an impediment [to loan workouts] we can take another look at the industry next year and see if there are other actions we can take to remove roadblocks,” Adamske said. “…The government is here to help. We want to rebuild neighborhoods from the ground up.”

Still the CRL folks remain unconvinced. “Existing programs to modify mortgages can’t and won’t help enough homeowners quickly enough to fix what ails the economy. Voluntary modifications continue to be dwarfed by foreclosures. Our housing and economic crisis will not be repaired until we act to prevent unnecessary foreclosures,” Calhoun said.

A proposed $700 billion financial sector bailout bill passed in the Senate Wednesday night by a vote of 74-25, after the U.S. House of Representatives failed to pass a similar bill Monday.

The legislative package will give the federal government the authority and funding to buy up roughly $700 billion worth of soured mortgage and insurance securities from major corporate players that would otherwise face bankruptcy.

In an effort to pass the controversial piece of law, the Senate also included $150 billion of tax break extensions and an increase in the federal deposit insurance limit from $100,000 to $250,000.

Until now, public opinion about the bailout had been extremely negative, but the past week of dramatic Dow Jones dips seem to be softening the stance of many voters on this issue. The main concern has been that a “rescue” plan would reward companies for their risky behavior and encourage more bad choices in the future.

The House could vote on the Senate’s bailout plan as early as Friday and House Majority Leader Steny Hoyer was optimistic about the bill’s chances of passing.

“I think there’s a good prospect of getting that done tomorrow,” said the Maryland Democrat on Thursday.

House Financial Services Committee Chairman Barney Frank was more cautious in his predictions.

“It’s still uncertain. I think it is likelier to pass than before,” Frank, a Massachusetts Democrat said in a CNN interview. “The main change is reality. I think that it’s not possible now to scoff at the predictions of doom if we don’t do anything.”

In other mortgage news, a new government program to help troubled homeowners began Wednesday and is expected to help as many as 400,000 American families.

HOPE for Homeowners gives the Federal Housing Administration (FHA) greater ability to insure home loans for mortgage holders facing foreclosure because of skyrocketing interest rates on their ARM loans.

The plan allows the FHA to back up to $300 billion in refinance home loans, but lenders must voluntarily participate, writing down such loans to 90 percent of their current appraised value. Many  HOPE for Homeowners proponents believe most lenders will be happy to get these bad loans off their books.

Steve Preston, Secretary of the Department of Housing and Urban Development called the initiative a “helpful step forward” but added that “it must be part of a larger vision for the future, a vision that will help Americans keep their homes and remain financially secure.”

Borrowers interested in participating in the FHA program can contact their lenders, speak with a HUD counselor, or call 1-888-995-HOPE.

Amid the flurry of banking bailout talks and stock market worries, the National Association of Realtors released a report Wednesday showing a decrease in existing home sales nationally last month.

The Associated found that sales of previously owned homes, including single-family, townhomes, condominiums and co-ops, dropped a seasonally adjusted 2.2 percent to an annual rate of 4.91 million units from a rate of 5.02 million in July. August figures are also down 10.7 percent from the same time last year.

The national median price for existing homes also fell last month to $203,100, a 9.5 percent slide from August 2007 when the median price was $224,400.

“The median home price reflects more transactions related to subprime loans,” said NAR chief economist Lawrence Yun. “Fewer than 10 percent of homeowners have subprime loans, but these mortgages are accounting for a disproportionately high share of sales in the current market. On the other hand, areas that have had sharp price cuts are seeing a turnaround in sales, which are rising very fast now in parts of California, Florida and Nevada.”

Yet home sales were still down in the West, falling 5.3 percent in August from July.“The highest concentration of foreclosures is in the West, which is weighing down the median price because many buyers are taking advantage of deeply discounted prices,” Yun said.

The Northeast saw a 6.6 percent decline in sales during the past month, while the Midwest and South experienced gains of 0.9 percent and 0.5 percent, respectively.

The main reason for sagging sales, according to NAR President Richard F. Gaylord, was the lack of mortgage financing. “The difficulty in obtaining a mortgage increased over past couple months, making it more challenging for creditworthy borrowers to find financing,” he said. “Our hope is that overly tight lending criteria can be loosened with reasonable standards and credit so that sales activity can catch up with demand. Interest rates have already declined, but there is a serious question as to whether a cash infusion by the U.S. Treasury into Wall Street would help consumers by improving mortgage funding.

“We urge Congress to restore access to sound mortgage credit so people have the ability to make and keep a long-term investment in the American dream of homeownership. Congress needs to take care of Main Street and not just bail out Wall Street.”

One bright spot in the NAR report was that inventory dropped by 7.0 percent during the same time to 4.26 million existing homes, representing some hope that the market is slowly balancing out.

Uncertainty among lenders and investors about the near future of the economy led to a rise in U.S. mortgage interest rates in the latest week, according to a recent survey from mortgage giant Freddie Mac.

During the week ended Sept. 25, 2008, the average rate on a 30-year fixed rate home loan climbed up to 6.09 percent, excluding points, from 5.78 percent the week before. One year ago, the average rate rested much higher still at 6.42 percent.

“Mortgage rates followed Treasury bond yields higher this week amid market uncertainty over the current state of the economy,” said Frank Nothaft, Freddie Mac vice president and chief economist. “Compared with last Thursday, 10-year Treasury yields are up about 0.3 percentage points, and 30-year fixed-rate loans moved up about the same amount. And while up, interest rates for 30-year FRMs are still more than 0.5 percentage points below this year’s peak of 6.63 percent set the week of July 24th.”

Nothaft also cited other market indicators as cause for the increasing rates. Because soft economic data is often reflected in national mortgage rates, he mentioned that home prices dropped 5.3 percent during the year ended in July according to the Federal Housing Finance Agency’s index. The National Association of Realtors similarly announced a 9.7 decrease in the August median sales price for existing single-family homes, a clear sign that the housing market has not yet hit bottom.

Rates on 15-year fixed rate mortgages also shot up in the past week, reaching 5.77 percent, excluding points, from 5.35 percent the previous week. One year earlier, the average rate was 6.09 percent.

The average rates on both five-year and one-year Treasury-indexed adjustable rate mortgages (ARMs) also increased, with five-year ARMs growing to 6.02 percent from 5.67 percent and one-year ARMs averaging 5.16 percent, up from 5.03 percent the a week earlier. Last year at the same time, the average rates for five-year ARMs and one-year ARMs were 6.15 percent and 5.60 percent, respectively.

In recent weeks, the federal government has announced plans to take over mortgage giants Freddie Mac and Fannie Mae, as well as lend money to insurance company AIG to stay afloat until it can sell off its major assets.

Analysts have been scrambling to come up with what this government bailout will mean for both Wall Street and taxpayers in the long run. In the short run, the hope is that the financial markets will have the cash they need to increase lending availability to consumers, especially in the mortgage industry as home prices continue to plummet and mortgage financing is harder than ever to acquire.

In subsequent announcements from the Bush administration, the plan to buy up millions of soured mortgage securities from Freddie and Fannie and to help near-bankrupt AIG will initially cost the federal government, and consequently the taxpayers, $700 billion, but there is no clear picture as to how much more could be required as time goes on.

Here is what Treasury Secretary Henry Paulson has had to say about the bailout proposal in the last few days:

Sept. 14: “Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe,” he  said in a Washington D.C. press conference.”A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance.”

Sept. 18: “I am convinced that this bold approach will cost American families far less than the alternative — a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion,” Paulson said before reporters at the Treasury Department in a prepared statement.

Sept. 21: “The biggest help we can give the American people is to stabilize our financial system right now and to prevent the system from clogging up, because if it does clog up, this is going to have an adverse effect on people’s abilities to get jobs, on their budgets, on their retirement savings, on lending for small businesses,” Paulson said on ABC’s “This Week” Sunday.

A recent study by the American Association of Retired People (AARP) revealed that the housing market’s foreclosure crisis has not left even older homeowners unscathed.

The study, conducted by the AARP’s Public Policy Institute found that roughly 684,000 homeowners age 50 or older were delinquent on their mortgage during the last half of 2007, with some 50,000 already in some stage of foreclosure.

 ”The public perception is that older Americans are financially secure in their homes,” said Susan Reinhard, director of the Public Policy Institute. “But the reality is that while many are in fact secure, hundreds of thousands of others are not and face unsettling uncertainty over their futures as homeowners.

“Older Americans depend on their homes both for shelter and as a retirement asset,” she added. “Losing a home jeopardizes long-term financial security, with limited time to recover.”

The over-50 crowd represented about 28 percent of all foreclosures and delinquencies nationwide, according to the study. And of all the age 50-plus people in the survey, 24 percent of them were behind on their home loan payments or in foreclosure. While the flip side indicates that the majority of seniors are still making their payments, there is still a significant portion of the population that are facing financial crisis with only a few years left before retirement.

One important, but unsurprising statistic of the study is that older homeowners with subprime mortgage loans (usually adjustable rate mortgages or ARMs) were 17 times more likely to be in foreclosure than their counterparts with prime or good credit loans.

As many Americans facing retirement lose their homes or have trouble keeping up with the payments, Reinhard suggested that the mortgage lending business needs to change. Referring to complex home loan contracts and aggressive loan officers and brokers, she said, “the mortgage environment is very complicated. We need more simplified mortgage contract language that people can understand.”

The AARP study included data from Experian credit reports from over 2.5 million people, including 1 million age 50 and older.

The U.S. housing market could be on its way to recovery within the next year, according to statements Monday from Treasury Secretary Henry Paulson, but he left the door open for future federal bailouts of key industry players if necessary.

“I believe that there is a reasonable chance that the biggest part of that housing correction can be behind us in a number of months. I’m not saying two or three months, but in months as opposed to years,” Paulson said in a Washington D.C. press conference.

“I think we’re going to have housing issues … and mortgage issues for years, but in terms of getting by the biggest part of this correction, if we can make this Fannie Mae-Freddie Mac effort work the way I would like to see it work, I think we’ll make real progress here,” he added in reference to the recent government takeover of the ailing mortgage giants.

Paulson called the housing correction the “root of the challenges”  for U.S. financial institutions and the economy as a whole, saying that until house prices stabilize and the mortgage market settles down, there will continue to be “turmoil in the financial markets.”

The government’s role, according to Paulson, in speeding up the correction is to make sure plenty of mortgage funding is available.  Several months before bailing out Freddie and Fannie, the federal government stepped in to keep a private sector company, Bear Stearns from going under.  Yet as major investment bank Lehman Brothers filed for bankruptcy Monday, the Feds maintained a hands-off policy, preferring instead to simply orchestrate a meeting of potential buyers to save the failed company.

When asked by reporters if the well of government bailout money had dried up for good, Paulson did not rule out the possibility of more intervention.  His stated that his primary concern was to “maintain the stability and orderliness of our financial system,” but added that “we do not take, and I don’t take, lightly ever putting the taxpayer on the line to support an institution.”

The Treasury Secretary urged consumers and investors to stay positive while “[we work] through a difficult period in our financial markets right now as we work off some of the past excesses,” and Paulson concluded that overall “the American people can remain confident in the soundness and the resilience of our financial system.”