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.”

A volatile economy continued to affect the U.S. mortgage market this week, causing mortgage demand and interest rates to plummet.

According to the Mortgage Bankers Association’s index, home loan application volume decreased by 20.3 percent to a a seasonally adjusted index reading of 379.9 during the week ended Oct. 31.

Both refinance and home purchase loan requests were lower in the latest week, with the MBA’s refinance index falling 27.8 percent o 1075.4 and the purchase index sinking 13.9 percent to 260.9.

Refinances made up only 42.9 percent of all mortgage requests, compared with 46.9 percent the previous week.

During the roughly the same time, interest rates on long and short term home loans fell as well, according to Freddie Mac Thursday.

“Mortgage rates fell this week amid new indications of a pullback in consumer spending and a weaker jobs market,” said Freddie Mac vice president and chief economist Frank Nothaft.

The average rate on a 30-year fixed rate mortgage decreased to 6.20 percent, excluding fees, from 6.46 percent the week before. One year ago, the average rate was 6.24 percent.

Rates on 15-year fixed rate loans dropped to 5.88 percent from 6.19 percent. At this time last year, 15-year mortgages averaged a rate of 5.90.

One-year adjustable rate mortgages carried an average rate of 5.25 percent, down from 5.38 percent one week earlier. Last year, the average rate was 5.50 percent.

According to Nothaft, tighter lending standards are having the biggest impact on demand and rates.

“With the economy contracting and experiencing record home foreclosures, lenders tightened their credit standards further, according to the October Federal Reserve Senior Loan Officer survey,” he said. “Approximately 70 percent of banks raised their lending standards for prime mortgages and about 90 percent of banks that offer nontraditional mortgages did so as well.”

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.

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.”

Mortgage giant Freddie Mac reported Thursday that interest rates on 30-year fixed rate mortgages made their largest week-to-week decrease this week in almost 28 years , falling 0.42 percentage point.

On news of the Federal Government’s bailout of Freddie Mac and sister corporation Fannie Mae, the national average rate dropped to a five-month low of 5.93 percent, with an average 0.7 discount point, during the week ended Sept. 11 from 6.35 percent the previous week and from 6.31 percent on year earlier.

“Interest rates for 30-year fixed-rate mortgages are down almost 0.6 percentage points over the past 4 weeks, which will help to spur home purchases and loan refinancing in coming weeks,” said Frank Nothaft, Freddie Mac’s vice president and chief economist. “This means that the monthly principal and interest payment on a new $200,000 loan is over $76 lower than a month ago.”

Fifteen-year fixed rate home loans also experienced an interest rate decrease to 5.54 percent from 5.90 percent last week. One year ago, the average rate was 5.97 percent.  Rates on one-year adjustable rate mortgages (ARMs) rose in the latest week, however, to 5.21percent, from 5.15 percent. Last year at this time the average was 5.66 percent.

Another report released Thursday showed that America’s riskiest home buyers are largely being shut out of the mortgage market. The Federal Reserve’s Home Mortgage Disclosure Act report revealed that as mortgage delinquencies and failures rose in 2007, home loan financing for sub-prime or poor credit borrowers decreased dramatically.

“One consequence of deteriorating loan performance and widespread declines in home values was a sharp contraction in 2007 in the willingness of lenders and investors to offer loans to higher-risk borrowers or, in some cases to offer to certain loan products that entailed features associated with elevated credit risk,” the Federal Financial Institutions Examination Council said in the report.

Total mortgage applications last year fell to 21.4 million, down 22 percent from 2006, and loan originations slipped to 10.4 million in 2007, a decrease of 25 percent from the previous year.

The riskiest of loans were also by and large taken off the market. Undocumented income loans fell 69 percent from 2006, a sign that lenders had been badly burned by mass failure of these “liar loans.”

These trends have certainly continued into 2008, with analysts expecting little change in strict mortgage requirements and home loan credit availability through the end of next year.

The Federal government announced yesterday its bailout plan for troubled mortgage finance companies Freddie Mac and Fannie Mae, but neither the Treasury Secretary or market analysts know exactly how much this government buyout is going to cost taxpayers in the end.

“I have long said that the housing correction poses the biggest risk to our economy,” said Treasury Secretary Henry Paulson in prepared remarks Sunday. “It is a drag on our economic growth, and at the heart of the turmoil and stress for our financial markets and financial institutions. Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing.”

Paulson said that the new goal for the government, by running Fannie and Freddie, will be primarily to increase the availability of mortgage financing to the public. 

The two government-sponsored entities back a large percentage of U.S. home loans, and faced with combined losses of $14 billion over the last four quarters, they were likely to fail soon without government intervention. The result would have left millions of home buyers without mortgage financing, further depressing the ailing housing market.

The government predicted that the move would lower interest rates for borrowers with good credit and bolster the stock market with assurances of Freddie and Fannie stability.

Yet the long-term cost to the nation could be in the range of tens of billions of dollars, according to many analysts.

“No one likes to put taxpayers into situations like this,” Paulson said in a Monday interview with Bloomberg Television. “Government intervention is not something I came down here wanting to espouse, but it sure is better than the alternative.”

Asked about the total costs of the bailout by CNBC reporters, Paulson replied “We ultimately don’t know.” He said it will depend on “how long it will take for housing prices to stabilize and the housing market to come back.”

Still by taking over Freddie and Fannie, Paulson reassured Americans in his speech Sunday that the Treasury has “acted on the responsibilities we have to protect the stability of the financial markets, including the mortgage market, and to protect the taxpayer to the maximum extent possible.”