Another new government program has just begun for homeowners on the brink of foreclosure. ELHP, or Emergency Homeowners’ Loan Program, provides a staggering $1 billion in FREE money for homeowners who are facing foreclosure due to job loss or unexpected medical expenses.

It gives these mortgage borrowers mortgage payment subsidies of up to $50,000 for no more than two years. Here’s an example from the Washington Post about Teri Ware, a single mom in Maryland whose daughter was born a year ago with a heart defect. Her daughter required 24-hour care, so Teri quit her job as a nurse, but soon was unable to keep up with her mortgage payment as well as all the medical bills.

Within a month, Ware was approved for $29,608 in aid through EHLP. The interest-free loan will repay $8,636 worth of mortgage payments that she owes in arrears to J.P. Morgan Chase and then pay about half her $1,727 mortgage payment for the next 24 months.

Ware was ecstatic when she found out. “I picked my daughter up and said, ‘We’re going to keep our home,’” she said with tears in her eyes. She plans to resume working and making mortgage payments on her own as soon as her daughter’s health improves.

And here’s the astounding part of EHLP: the loan will then be FORGIVEN over the next five years as long as borrowers stay in that home and keep up with the loan payments. Participants do not have to pay anything for this, ever. It’s like the government just became the fairy godmother for down and out homeowners, making all their wishes come true.

And that is exactly what some people do not like about this program - Rep. Jeb Hensarling (R-Tex.) has been against this initiative from the start. Back in February, he sponsored a bill to kill it, calling it “an act of fiscal child abuse.” Hensarling’s take on this program is that “the best foreclosure mitigation program in America is a job. It’s not a government check, it’s a paycheck.”

The government hopes to help 30,000 of the 1.8 homeowners nationwide facing foreclosure. It is available only in 27 states and candidates must apply before July 22.

President Obama’s budget deficit commission is considering one option for reducing the national debt: reducing or eliminating the mortgage interest tax deduction. The idea has made no small stir in the mortgage market community.

The current mortgage tax break is one of the costliest for the U.S. government. It is used by 35 million American homeowners each year, enabling them to deduct all the interest paid on their mortgage for their primary residence and a certain percentage of interest paid on vacation or rental home mortgages. The government is estimating that this deduction will result in $131 billion lost from potential revenue.

Some proposals call for removing this tax perk altogether, while another would allow borrowers to deduct interest only on primary residence mortgages, and only those with a maximum price tag of $500,000, instead of $1 million as it stands now. The Wall Street Journal blog says that about 70 percent of the home tax deduction benefits go to the top 20 percent of taxpayers (those with the highest incomes.)

Here are the pros for getting rid of the tax break:

• “There is an increasing understanding that single-family housing has been over-subsidized, and that’s to the detriment of the broader economy.”
  -Mark Zandi, chief economist at Moody’s Analytics
• Allowing borrowers to deduct interest on home equity loans promotes reckless behavior.
• “No one can make a serious intellectual argument in favor of the mortgage interest deduction. Why should the government subsidize homeowners rather than renters? The only thing it’s good for is middle-class votes.”
  -Calvin Johnson, a tax professor at the University of Texas

And the cons:

• “Housing is critical to the economy. In my view, [losing the deduction] will surely put us in a broader economic recession.”
  -Lawrence Yun, chief economist for the National Association of Realtors
• It could have a detrimental impact on expensive coastal homes as well as vacation home communities, -Attributed to Robert Dietz, tax economist for the National Association of Home Builders.
• “The mortgage interest deduction is one of the pillars of our national housing policy. Limiting its use will have negative repercussions for consumers and home values up and down the housing chain.”
  -Michael D. Berman, chairman of the Mortgage Bankers Association. (Quoted in the New York Times)

Based solely on “fairness,” it would not seem that the mortgage-interest tax deduction fits the bill, but because so many current homeowners depend on this saved money, I think it could only be done away with by being phased out slowly.

A piece in the Wall Street Journal’s website today exposed the well-kept banking secret known as loan “recasting” or “re-amortizing,” a strategy that can help mortgage borrowers lower their monthly payments and save on interest. And I can see why its not talked about that much - it’s just not that useful to most homeowners.

This is the rundown: A borrower petitions his lender and/or mortgage servicer to allow him to make a sizeable contribution to the principal of the loan after which the lender agrees to re-amortize or reset the loan based on the new loan balance.

Here’s the example from the Journal:

For example, a person with a 30-year $300,000 fixed-rate mortgage and an interest rate of 4.75% who recasted one year into the loan by putting in $60,000 toward the principal would trim his balance to $235,371. Assuming there were 29 years left on the loan, that would result in a monthly payment of $1,247 instead of the original $1,565.

That’s nice, but my first thought was: Who has an extra $60,000 laying around to throw at their mortgage?!?! But apparently this is a real savings strategy. The article says that JPMorgan Chase & Co. performs 200 recastings a month (out of 10 million home loans) and Bank of America Corp. performs 200 to 300 (out of 14 million home loans per month.)

Apparently this is a good option for those who want to save money on their mortgages monthly but cannot refinance due to bad credit or who have gotten no-documentation loans before (which most self-employed individuals have to do.) It allows the monthly payments to drop without all the high cost of refinancing, although there are some small associated fees.

I admit this method will save you money, but you first have to come up with the cash (Chase requires a $5,000 contribution, and Bank of America has a suggested minimum of $1,000), and then you must convince the people in charge of the loan to go along with the scheme. It sounds like a lot of work when you could just add extra money to your principal each month or year on your own. It may not lower your monthly payment but it will save you on interest! And if you have all that extra cash, why do you need to lower your monthly payment in the first place?

Recent comments from top Federal Reserve Officials are making it clear they are not yet worried about inflation and they certainly expect to leave their target interest rate alone for quite awhile.

Atlanta Federal Reserve President Dennis Lockhart, in a speech before the Rotary Club of Nashville, said:

“Certainly we have low interest rates today…I would expect that to continue for some time.”

He was also upbeat about the coming recovery of the markets.

“The economy is stabilizing and recovery will begin in the second half [of this year].” However, the rebound “will be weak compared with historic recoveries from recession…current economic conditions are mixed at best.”

He summed up his position by saying “nothing in the incoming data has altered our view that the economy is nearing a bottom and will soon begin a very slow recovery.”

Fed Chairman Ben Bernanke said in the Wall Street Journal today that:

“Since the onset of the financial crisis nearly two years ago, the Federal Reserve has reduced the interest-rate target for overnight lending between banks (the federal-funds rate) nearly to zero… My colleagues and I believe that accommodative policies will likely be warranted for an extended period.”

So we probably won’t see mortgage rates rising much in the near future due to Federal Reserve actions. That doesn’t mean that they can’t or won’t climb. Any increase will be simply a result of Treasury yields and market consensus on the state of the economy.

Federal Reserve efforts helped long-term mortgage interest rates drop to their lowest point on record, for the fourth straight week, according to mortgage giant Freddie Mace Thursday.

“Interest rates for 30-year fixed-rate mortgages fell for the tenth week to a fourth consecutive record low due in part to the Federal Reserve’s recent purchases of mortgage-backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae,” said Frank Nothaft, Freddie Mac vice president and chief economist. “On November 25, 2008, the Federal Reserve announced that it planned to purchase up to $500 billion of these securities by the end of June of this year. For the sake of comparison, there were roughly $4.7 trillion of such securities backed by home mortgages available as of September 30, 2008.”

“Since the end of October 2008,” Nothaft added, “these rates have declined by almost 1 1/2 percentage points, or payment savings of about $184 a month for a $200,000 loan – an additional $11 dollars from last week.”

The average rate on a 30-year fixed rate home loan fell to 5.01 percent, excluding fees, during the week ending January 8, 2009, down from 5.10 percent the previous week. The 30-year loan rate has never been lower during the entire 38-year history of the Freddie Mac weekly survey. Last year at this time, the average rate was 5.87 percent.

Rates on 15-year fixed rate mortgages averaged 4.62 percent, a decrease from 4.83 percent the week before. One year earlier, the average 15-year FRM rate was more than three-fourths of a point higher at 5.43 percent.

One-year adjustable rate mortgages carried an average rate of 4.95 percent, an increase from 4.85 one week previous. A year ago, the one-year ARM average rate was 5.37 percent.

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.

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.

Even in the face of rising inflation, the Federal Reserve is unlikely to raise their target interest rate through the end of 2008, based on comments Friday from Fed Chairman Ben Bernanke.

“The Federal Open Market Committee (FOMC) has maintained a relatively low target for the federal funds rate despite an increase in inflationary pressures,” Bernanke said in a speech at the annual economic symposium in Jackson Hole, Wyoming. He explained that this strategy is based on the Fed’s expectation “that the prices of oil and other commodities would ultimately stabilize… and that this outcome…would foster a return to price stability in the medium run.”

Bernanke went on to say that he is encouraged by the “recent decline in commodity prices, as well as the increased stability of the dollar,” and that,  if the Fed does not interfere by increasing its interest rate, these conditions would lead to a better pace of inflation by the beginning of next year.

During the past year, the Federal Reserve has decreased its federal funds rate from 5.25 percent to 2 percent, in response to meltdowns in the financial and mortgage markets. Yet because of lower interest rates as well as soaring oil and food prices, consumer inflation has risen from 2 percent to a rate of 5.6 percent during the same period.

In order to get inflation under control, some on the Fed board say an increase in the target rate is the only solution. “If we don’t reverse our accommodative stance sooner rather than later, we will face rising inflation, which may be costly to deal with,” Philadelphia Federal Reserve Charles Plosser said in an interview published  Monday in the New York Times.

Still others support Bernanke’s position, saying that most economic players, particularly mortgage lenders and bankers, are not ready for a rate hike. Janet Yellen, president of the San Francisco Fed argued, “Lenders have been hit by a shock so severe that they are contracting and withdrawing from private sector lending.”

The FOMC meets again in mid-September to determine if any interest rate changes are necessary.