During the first two weeks of September 2009, mortgage interest rates have trended downward and are considerably lower than August’s averages. According to mortgage company Freddie Mac, the average rate on a 30-year fixed rate loan last week, excluding points, was 5.07 percent, down from the average for all of August which was 5.19 percent.

Is the lower trend likely to stick around for the rest of the month? It’s always hard to say, especially because there are two big factors this month that might try to pull rates in opposite directions. First, the Federal Reserve recently announced that the amount of consumer credit across the nation dropped by $21.6 billion in July, and credit availability dropped even more than reported in June. The Fed said that after six straight months of decreasing consumer credit figures, this is the largest decline since the Fed started its survey in 1943. What this means for interest rates is that when consumer credit shrinks fewer people are borrowing money, and there are fewer mortgage backed securities (MBS) for investors to buy. As the price for those increases because of a shriveled supply, it could push mortgage rates down as lenders try to attract more borrowers back to the mortgage table.

The second factor, however, is that the Fed has also announced its plans to stop purchasing U.S. Treasury bonds. It has been buying these up throughout the year to pump more liquidity into the markets, but as the economy has started to show signs of life again, the Fed has decided to back off in hopes that the market is beginning to correct itself. Some predict that this move will cause bond yields to rise and bring mortgage rates with them.

So far, rates have moved lower this month, so maybe the consumer credit issue is the more influential factor right now. Rates are near historic lows right now - so in the long run, they really only have one direction to go and that is up. For those who can qualify for funding, now is a great time for a mortgage loan.

Speaking to the National Association for Business Economics on Monday, the President of the Richmond Federal Reserve Bank expressed his fears about the Fed’s recent and current emergency financial aid actions. Specifically, President Jeffrey Lacker mentioned how the Fed may have opened its doors to unwanted political pressures by stepping in last year to provide private corporations with capital to keep the markets moving.

“Using the Fed’s balance sheet is at times the path of least resistance, because it allows government lending to circumvent the congressional approval process,” Lacker said.

“This risks entangling the Fed in attempts to influence credit allocation, thereby exposing monetary policy to political pressure,” he told the Association.

Lacker also underscored the risks associated with the inevitability of cutting the funding to these struggling banks and lenders.

“At some point in the future, the Fed will need to withdraw monetary stimulus to prevent a resurgence of inflation when the economy begins to recover,” he said.

“That time could arrive before credit markets are deemed to be fully enough ‘healed’… If monetary policy and credit programs remain tied together, as they currently are, we risk having to terminate a credit program abruptly, or else compromise on our inflation objective,” Lacker said.

At the past meeting of the Federal Open Market Committee, Lacker, a voting member of the board this year, dissented against the Fed’s decision to continue to spend billions of government money on propping up failing financial institutions. His solution was to provide more market liquidity through the purchase of more U.S. Treasury securities.

In his Monday speech, Lacker called on the Fed to let the U.S. Treasury Department take on the lending role, as it is always required to have official approval from Congress. Letting the Treasury take over would, according to Lacker, allow the Federal Reserve to maintain its long-time held and treasured independence from legislation.

Home prices will continue to sink another 11 percent in the coming months, resulting in a 36 percent overall decrease in home values, according to report released Monday from Moody’s Economy.com, but the silver lining is that they will bottom out by the end of the year.

“Notwithstanding the intensifying economic gloom, the bottom of the housing downturn is within sight,” chief economist Mark Zandi said in a statement today. “Presuming we see strong action by policymakers to help support the economy and the housing market, prices will begin to recover by the end of this year.”

To date, the 381 metropolitan areas included in the Case-Shiller home price index have experienced a 25 percent decrease on average in home values. Before the end of 2009, Moody’s predicts that 62 percent of those areas will see double-digit declines before the correction is through.

The house prices in Southeast Florida is likely to be hit hardest during the coming year with values in Naples, Florida forecasted to fall 70.1 percent from 2005 to the last quarter of 2010. Moody’s predicts that the next biggest losses with be in Merced, California where prices will probably drop 69.6 percent.

Moody’s predictions are all based on assumptions that the U.S. government will aggressively legislate ways to stimulate the economy. “Policymakers have not yet been able to break the downward spiral that has developed among the sinking housing market, job losses, frozen credit markets, and rising foreclosures,” Zandi said.

Yet, even if the newest bailout package comes together and consumers profit from an expansion of the first-time home buyer tax credit, Moody’s warns that the housing market recovery after 2009 will not not bring growth back to its pre-downturn rate until the end of 2010.

President-elect Barack Obama has not asked President Bush to release the remaining $350 billion Troubled Asset Relief Program funds and he will not act unless Obama wants him to, Bush said Monday in his farewell news conference.

“I have talked to the president-elect about this subject,” the President said. “I told him if he needed the $350 billion on my watch, I’d be willing to ask for it.. if he felt like it needed to happen on my watch.”

“He hasn’t asked me to make the request yet, and I don’t intend to make a request unless he specifically asks me to make it,” Bush added.

Obama may still ask Bush to release the funds, allowing them to be available a few days into the new administration, which begins January 20. Yet, requests from either president are likely to be met with some resistance and certainly many preconditions by Congress.

Congressional members of both parties have been disappointed with the Treasury’s use of the first half of the TARP funds, which have mainly been used to buy up mortgage-backed securities from Freddie Mac, Fannie Mae, and Ginnie Mae in order to promote greater mortgage lending. The investments were made with almost no strings attached and many fear that there will be little accountability for the use of the taxpayer money.

Others on the hill are upset because they hoped to see the money used more directly for saving homeowners from foreclosure. There is talk that Obama may be required to write a letter of assurance about his intentions for the remaining money before Congress will release it.

“The best course of action, of course, is to convince enough members of the Senate to vote positively for the request,” Bush said of the Congressional discontent on the matter.

President Bush did, however, state that he was pleased overall with the way the first $350 billion was spent, saying that mortgage rates had dropped and lenders have felt the effect of greater liquidity.

“Credit spreads are beginning to shrink, lending is just beginning to pick up,” he said. “The actions we have taken, I believe, have helped thaw the credit markets, which is the first step toward recovery.”

The U.S. Treasury Department has already committed $350 billion of the $700 billion rescue fund, including $13.4 billion for troubled automakers, according to Treasury Secretary Henry Paulson, and Congress will need to release the rest soon to keep emergency funds available to aid the markets.

“Today, we have acted to support General Motors and Chrysler, with the requirement that they move quickly to develop and adopt acceptable plans for long term viability. This step will prevent significant disruption to our economy, while putting the companies on a path to the significant restructuring necessary to achieve long-term viability,” Paulson said in a statement Friday. “…As a result of this decision, Treasury effectively has allocated the first $350 billion from the TARP (Troubled Asset Relief Program.) It is clear… that Congress will need to release the remainder of the TARP to support financial market stability.”

He did, however, say that he has “confidence that we have the necessary resources to address a significant financial market event,” based on the powers of the Federal Reserve, the FDIC, and the money that has been committed but not yet disbursed.

Paulson mentioned his intention to discuss plans for moving forward with the economic team of President-elect Barack Obama and with congressional leadership.

The Secretary may get a fight for the requested money from several members of Congress though. Congressman Barney Frank, D-Mass., Chairman of the House Financial Services Committee has vowed to block the use of more funds unless Treasury is committed to allotting a great deal of it toward helping foreclosure-bound homeowners.

“They’re not going to get the (money) unless they get very serious about the foreclosure modifications and showing us how we’re going to get some lending out of the banks,” Frank said earlier this month.

To date, in addition to the commitment of $13.4 billion this week for the auto industry, the Treasury has allocated $315 billion of the original $350 billion bailout funds for providing more resources for banks and American International Group as well as  $20 billion for use in consumer credit markets.

The number of mortgage applications specifically for government-insured home loans continued to grow in October, according to recent data from the Mortgage Bankers Association.

The government-insured share of all applications (including Federal Housing Administration or FHA loans) rose to 32.9 percent during October 2008, the highest percentage since February 1991. It was also up dramatically from a 10.3 percent share last year at the same time. The percentage has steadily risen since the beginning of this year when it was 9.4 percent.

“This increase in the share of government-insured mortgage applications provides further evidence that there are still loans available to qualified borrowers, particularly through the FHA,” said MBA Chairman David G. Kittle. “The mortgage market remains fully operational and lenders are working to ensure borrowers with sufficient down payment and good credit have the opportunity of homeownership.”

The MBA suggested several reasons for the rise in popularity of government-insured loans over the past year.

For example, FHA loans are among the least expensive mortgages when it comes to down payment requirements. Borrowers can make a down payment as little as three percent of the total loan amount.

Another reason is that the Economic Stimulus Act of 2008 in March and then the Housing Bill in July raised the conforming loan limits, making it possible for those in high-cost markets to take advantage of FHA programs.

Additionally, borrowers with less than perfect credit will often more readily qualify for FHA loans than they would with loans from companies like Freddie Mac and Fannie Mae. +

Finally, FHA loans offer upfront mortgage insurance premiums which are often more attractive to buyers than paying hundreds of dollars in private mortgage insurance until the loan-to-value ratio reaches 80 percent or more.

As the economy becomes increasingly unstable, more and more borrowers are finding safety and financing availability with FHA loans. That will likely remain the case until the market reaches equilibrium again and investors return to mortgage backed securities arena.

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.”