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.

A recent Washington Post article brings up how deeply involved the Federal government has become in the current housing market. In order to keep the mortgage markets from freezing up during the dire days of the housing crash, the government stepped in and took over Fannie Mae and Freddie Mac, two of the nation’s largest mortgage financiers.

“While this made it possible for many borrowers to keep getting loans and helped protect the housing market from further damage, the government’s newly dominant role - nearly 90 percent of all new home loans are funded or guaranteed by taxpayers - has far-reaching consequences for prospective home buyers and taxpayers,” the article says.

And together with guarantees made by the Federal Housing Administration, “The [government] outlay has already reached about $1 trillion over the past year and is rising. During that time, the government has pumped more money into the mortgage market than has been spent on Medicare or Social Security or the defense budget, more even than Washington has paid to bail out banks and other struggling companies.”

And with Treasury and Federal Reserve programs, “all told, the government now stands behind 86 percent of all new home loans, up from about 30 percent just four years ago, according to Inside Mortgage Finance.”

Among the biggest concerns about the government takeover of all these loan guarantees is that many of the loans are looking ripe for default and foreclosure. Fannie and Freddie have lost more than $150 billion since the beginning of 2008 and FHA loan delinquencies are also rising. So, instead of truly curtailing housing market problems, have we simply shifted the responsibility from individual homeowners, lenders, and companies to the American public (taxpayers) at large? So we all go down together instead of just one industry? Or will the Fed just print up some more money to continue bailing out the housing market if things really go south?

The nation’s two largest residential mortgage funding companies, already under government conservatorship, may be asking for more money in the coming weeks, as loan delinquencies loom larger and the many subprime securities in their portfolios continue to suffer.

Freddie Mac made a regulatory filing Friday with the U.S. Treasury Department stating an intent to borrow another $30 billion to $35 billion in order to makeup for projected fourth quarter losses. Rival company Fannie Mae is likely to ask for $5 billion to $10 billion for similar efforts.

The two mortgage giants guarantee or hold almost half of all U.S. home loans and both were seized last September by the federal government. As both companies experienced deep portfolio losses and ultimately faced bankruptcy, the Treasury stepped in and established a conservatorship of each in order to save the already foundering mortgage market from a potentially crippling blow if either Fannie or Freddie went belly up.

Prior to the takeovers, both Fannie Mae and Freddie Mac were government sponsored entities, chartered by Congress to help provide money for increased homeownership but run by private interests.

Fannie and Freddie are perceived as being vital to the nation’s housing market, especially at this time as other sources of mortgage funding have contracted during the current credit crunch.

Freddie has seen greater losses  than Fannie in the latest quarter as its portfolio is stocked with more subprime mortgage backed securities. There are some analysts who believe that Fannie will be subject to more risk and loss through the current year as the value of mortgage securities is expected to drop further.

To date,  Freddie Mac has drawn out $14 billion of the $100 billion available from the Treasury. The newly requested funds for the company, based in McLean, Virginia, will be injected in the form of senior preferred stock.

Interest rates on long-term mortgage loans fell to another all-time low this week, breaking the 5 percent barrier, according to mortgage giant Freddie Mac Thursday.

“Interest rates for 30-year fixed rate mortgages fell for the 11th straight week to another record low, due in part to the slowing economy and government actions,” said Frank Nothaft, Freddie Mac vice president and chief economist.

“So far,” he explained, “both the U.S. Treasury Department and the Federal Reserve have added over $100 billion in liquidity to the mortgage market since September 2008, which put downward pressure on interest rates for fixed-rate mortgages. The Federal Reserve may add up to an additional $570 billion more this year, based on its November 25, 2008 announcement, to further shore up mortgage lending and keep rates low.”

The average rate on a 30-year fixed rate mortgage dropped to 4.96 percent, excluding fees, during the week ended January 15, 2009, down from 5.01 percent the previous week. The rate has never been below 5 percent since Freddie Mac began keeping track of weekly rates in 1971. One year ago, the average rate was 5.69 percent.

Rates on 15-year fixed rate loans increased slightly however in the latest week with the average growing to 4.65 percent from 4.62 percent one week earlier. Last year at this time, the average rate was 5.21 percent.

One-year adjustable rate mortgages carried an average rate of 4.89 percent, down from 4.95 percent the week before. During the same week of January 2007, one-year ARM rates were higher than even fifteen-year FRM rates at 5.26 percent.

Meanwhile, during roughly the same week, the Federal Reserve bought up $23.4 billion of mortgage-backed bonds from Fannie Mae, Freddie Mac, and Ginnie Mae in an attempt to keep rates low and pump liquidity back into the lending markets.

A new report from two prominent academic economists predicts the U.S. housing market downtown will not bottom out until 2010.

The report entitled, “The Aftermath of Financial Crises” authored by University of Maryland economist Carmen Reinhart and Harvard economist Kenneth Rogoff, suggested that the nation’s unemployment rate may sink to 11 percent or lower by the end of next year. Such numbers would result in a loss of 6 million to 7 million jobs during that time. The current unemployment rate, as of November 2008, was 6.7 percent.

As the housing and mortgage markets continue their descent and unemployment continues to rise, the national debt will likely rise to historic levels.

“The big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions, as well as often ambitious countercyclical fiscal policies aimed at mitigating the downturn,” the authors said. “The much ballyhooed bank bailout costs are, in several cases, only a relatively minor contributor to post–financial crisis debt burdens.”

The report, presented at the annual meeting of the American Economic Association in San Francisco, noted that even dramatic actions by the Federal Reserve may not be enough to shorten the downward housing spiral.

“Some central banks have already shown an aggressiveness to act that was notably absent in the 1930s,” they said. “On the other hand, one would be wise not to push too far the conceit that we are smarter than our predecessors.”

In fact, the Federal Reserve increased its efforts Monday with the purchase of mortgage-backed securities that were backed by Fannie Mae, Freddie Mac, and Ginnie Mae.  According to Fed statements, the central bank may buy up to one-ninth of all the outstanding MBS bonds sold by the three government-sponsored companies. Promises to buy such bonds have already caused mortgage rates to plummet and home mortgage applications to rise.

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.

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.

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.”

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.

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.”