You'd think the subprime bust would mean no more mortgages for borrowers with little skin in the game. Well, it doesn't.

While most lenders have tightened standards for down payments — usually requiring at least 10% down and 20% for the best rates — the Federal Housing Administration has continued to offer loans to borrowers putting down as little as 3.5%. On Thursday the House Financial Services Committee is considering whether to boost the minimum down payment requirement to 5%.

I think the move is overdue, especially since FHA mortgage defaults are at a record high and the agency's reserve fund is at a record low. More

A looming shift in Federal Reserve policy could send the 30-year fixed mortgage to 6% or higher, up from Monday’s rock-bottom rate of 5.02%. For all the hullaballoo about the stimulative impact of last week’s decision to extend the $8,000 First-Time Home Buyer Tax Credit and create a $6,500 credit for current homeowners, a sharp rise in the bellwether mortgage rate could muck up a housing recovery. More

Five personal finance highlights from around the Web:

• FICO, the company that provides the nation's leading credit score, reveals how many points a consumer's credit rating will drop as a result of specific events. LIz Pulliam Weston sheds light on the impact of maxing out a card or making a late payment. [MSN Money]

• Will the McMansion buyers of the future want to live without theater roooms and butler's pantries? Luxury home builders think so. [The Wall Street Journal]

• '"I want to be rich" is not real a goal. And good financial planning requires clear, measurable goals. [The Boston Globe]

• Buffett: Investment opportunity is greater in the United States than abroad. The Oracle thinks the worst of the financial panic is behind us. [Reuters]

• Temporary conforming loan limits won't expire this year. The Federal Housing Finance Authority will extend the limit of $417,000 (up to $729,750 in high-cost areas) through 2010. [Washington Business Journal]

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Adjustable-rate mortgages have gotten a pretty bad rap since the housing market tanked a few years ago. After all, the over-availability of ARMs undeniably contributed to the housing bubble and following foreclosure wave. So readers of my recent piece in MONEY’s November issue, “Is it Time to Dump Your ARM?,” might have been surprised to see a recommendation that some homeowners refinancing out of one ARM should refinance into another one.

That’s because despite their flaws, hybrid ARMs, which start out with a fixed-rate period and then adjust on a recurring basis when that period is up, still represent a smart choice for educated borrowers who understand their risks. More

Reverse mortgages are increasingly the go-to solution for retirees confronting insufficient nest eggs and paltry income payouts in today’s low-rate environment. Last year, the number of new Home Equity Conversion Mortgages insured by the federal government amounted to 112,000 — more than 14 times the HECMs that were originated in 2001. The 2009 tally is expected to be even higher.

Last week’s news that 2010 Social Security benefits will not be given a cost-of-living adjustment — for the first time since inflation protection was added to the program in 1975 — will likely fuel demand for reverse mortgages. And lenders on the prowl for post-meltdown revenue sources are eager to boost the supply. More

Mortgage rates are below 5% again. But they might not stay that way for long — even though the Federal Reserve reaffirmed its ridiculously low, 0% to 0.25% target for the federal funds rate.

Yes, it's great for borrowers that the Fed kept its target rate so low. But the text you should really care about is this little tidbit from the Federal Open Market Committee's policy statement:

"To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010."

More

It's not shocking that the National Association of Realtors is working hard to have the $8,000 first-time home buyer tax credit extended past its current December 1st expiration. But what is surprising is how little public discussion there is of the downside of this extension.

It's a full-court press from the NAR: The powerful trade association has its lobbyists pushing the case on the Hill, and it's asking its members to get the message out too. In a video featuring member Realtors talking up the virtues of the credit, the NAR includes a message superimposed on a wave of stars evoking the U.S. flag: Congress: Don’t Let America’s Real Estate Recovery Expire.
More

Five months after launching the Home Affordable program designed to keep millions of Americans from losing their homes to foreclosure, the Obama administration had to summon mortgage executives to D.C. in late July to ask: What gives? So far, 230,000 loan modifications are up and running. That represents just 15% of the homes that were hit with foreclosure filings in the first six months of 2009 according to RealtyTrac, and comes on the heels of 2.3 million properties that received foreclosure notices in 2008.

The magnanimous explanation is that the mortgage industry simply needs time to get its systems and personnel up to speed on processing applications. The less magnanimous take, as reported in the The New York Times, is that mortgage servicers have plenty of financial incentives to drag their heels.

For all its public jawboning, the administration nonetheless insisted that Home Affordable is “on pace” to help millions of homeowners over the next three years, and set a public goal of having 500,000 loan modifications up and running by November.

But at the same time there seems to be growing acknowledgment that foreclosure prevention is just one part of the equation. Attention is now shifting to what to do with all the existing foreclosures and the steady stream that is expected to continue flooding the market even if Home Affordable lives up to its goals.

One proposal making the rounds in D.C. is Right to Rent: a program, first floated two years ago by liberal think-tanker Dean Baker, that would allow folks who have lost their home to foreclosure to continue living in the home as a renter.  As Baker sees it, giving the foreclosed the right to rent their home at a market rate for a long stretch (perhaps five to 10 years) is a win-win. The landlord (an investor or bank) gets market rental income, the homeowner isn’t uprooted, property values aren’t further depressed by foreclosure fire sales, and taxpayers aren’t asked to bail out lender or borrower. In mid-July a Treasury official confirmed the administration is mulling the idea.  The House has supplied traction too, recently passing the Neighborhood Preservation Act, which would permit FDIC-insured banks to lease back homes to folks it has foreclosed on. Did you catch that artful spin? This isn’t solely about helping the foreclosed; it’s about protecting your neighboring home’s value.

I’m a bit dubious how this might play out in the real world. First off, determining “market value” rent is going to be interesting. The current thinking is that appraisers will handle that job, and we all know how smoothly things are going in that neck of the real estate world. I’m also curious how homeowners stripped of their equity will respond to sending a rent check to the lender who foreclosed on them. (Or to the investor who buys the foreclosed property from the lender.)  Thoughts?

Based on the comments about an earlier post covering a government-assisted mortgage refinancing program, I don't think you're going to like the latest news out of Washington.

Late last week the Obama administration loosened the eligibility rules for the refinancing arm of its Home Affordable Plan, designed to help home owners who want to take advantage of lower interest rates but haven't been able to refinance. As a result of the change, home owners whose first-mortgage balance is up to 25% higher than their house's value can qualify for the federal refi program. When the program launched a few months ago, the upper limit was 5% under water, but that proved too stringent; the government raised the LTV ratio to 125% because not that many folks were qualifying for the program that the Administration launched with expectations — hopes? — of helping up to 4 million homeowners.

In making the official 125% LTV announcement, the Federal Housing Finance Agency added that it is “incenting” these borrowers to get out of their negative-equity morass sooner rather than later. But it turns out the incentive is nothing more than suggesting that folks choose a shorter mortgage term — say, 25 years rather than 30 years — and thus qualify for a slightly lower mortgage rate.

That’s not exactly a rip-roaring special incentive. It is no different than the incentive all lenders offer all borrowers who opt for a shorter term, whether part of a federal bailout program or not. The typical spread between a 30-year fixed-rate mortgage and a 15-year mortgage, for instance, is one-half a percentage point; Freddie Mac’s most recent  mortgage survey reports an average rate of 5.4% on a 30-year fixed-rate and 4.87% for a 15-year. In essence, the special “incenting” held out by the FHFA seems to be nothing more than now allowing folks to take advantage of a common industry practice: Choose a 15-year, 20-year or 25-year mortgage and you will be eligible for a lower interest rate than if you choose a 30-year term.

And you really have to wonder how enthusiastically home owners will jump at taking on the higher monthly payments that accompany a shorter-term loan. Are we really to expect that someone up to 25% under water is in a rush to build up equity? Or, as is more likely, are they turning to Home Affordable to get their current monthly costs as low as possible so they can stay in a home they might otherwise not be able to afford?

For an elderly person with few assets, a reverse mortgage can be a lifesaver: It enables cash-poor retirees to tap equity in their house for living expenses, home repairs or health care needs. If you’re 62 or older, reverse mortgages allow you to borrow against the value of your home and not repay the loan until you sell the house, move out or die. If the amount owed is more than the value of the house, the lender eats the difference. If it's less, you (or your heirs) keep what's left over after paying off the loan. In the meantime, the loan provides income, which you can take as a lump sum, monthly payout or line of credit drawn on as needed.

But make no mistake: Reverse mortgages, which come with high fees and hefty interest charges, are a costly option and often sold by aggressive salespeople who push inappropriate financial products on vulnerable seniors. That’s why Senator Claire McCaskill (D-Mo.) held hearings Monday in St. Louis on reverse mortgages. A year and a half ago, Sen. McCaskill began investigating problems associated with reverse mortgages, including predatory lending, aggressive marketing and the potential risks to the federal government — which insures 90% of reverse mortgage loans. Comptroller of the Currency John Dugan earlier this month said reverse mortgages bear a striking similarity to the risky sub-prime mortgages that got so many Americans in financial hot water. The Federal Housing Administration estimates it may lose $800 million from insuring these loans in the next fiscal year.

Yet the number of people getting reverse mortgages keeps rising. Even as home values are falling (leaving seniors with less equity to tap), more than 112,000 reverse mortgage loans were made in 2008, up from about 22,000 in 2003, according to the National Reverse Mortgage Lenders Association. Monthly reverse mortgage loan volume is setting records too, with nearly 9,000 reverse mortgages made in May.

My colleague Walter Updegrave wrote about the problems with reverse mortgages last year, spelling out how greedy salespeople not only persuade seniors to take out high-commission reverse mortgages, but also convince them to spend the proceeds on high-priced financial products such annuities, boosting their commissions even more.

Retiree advocates at AARP say that predatory lenders are also attempting to get seniors to use proceeds of their reverse mortgage to buy expensive long-term-care insurance. But in most cases, it makes more sense for seniors to use the payout for actual long-term care, not a hard-to-use insurance policy.

If you are considering taking out a reverse mortgage or have a parent or family member who is, don’t fall for a pitch from a salesman who cares more about a lucrative commission than determining whether a reverse mortgage makes sense for you. To learn more about reverse mortgages, check out resources at AARP and HUD.

Do you know anyone who is considering a reverse mortgage or has had a negative experience taking out a reverse mortgage? Tell us about that experience.

According to two leading surveys of our collective financial mood we have been  feeling less pessimistic these days. The latest Reuters/University of Michigan consumer survey for June  shows a slight uptick to 69 from 68.7. And at the end of May the Conference Board Consumer Confidence Index clocked in with another strong gain, rising to 54.9 from 40.8 in April. Now of course, that’s still far from optimistic; back in October 2007 when the stock market hit its peak, the Conference Board survey registered 95.2; so we’re still about 45% below our most recent confidence high.

Given that our spending is a key green shoot, our confidence matters big time. And though well off the highs, the trend toward more confidence is good news.  But we could be in line for a relapse. Just in time for summer drive time, the average price of gas is up to $2.69 a gallon (for regular) , a 65% rise from its Jan ’09 level, and a full 10% more than what we paid over Memorial Day weekend.  Tom Kloza, chief oil analyst at the Oil Price Information Service, noted in a recent blog post that we’re now spending $1.01 billion a day for gas, compared to $600 million or so at the beginning of the year.  The question of whether that starts to impact consumer confidence and spending depends on your frame of reference. Yes, prices are a lot higher today than they were in January, but they are also way below the July 2008 peak of  $4.11 a gallon. No one is predicting $4 a gallon — at least not anytime soon — but nor are we going to see a return to $1.65 a gallon (the average winter low) either.

The recent uptick in mortgage rates is also causing wallet pain for potential refinancers (the bulk of the market right now). Two weeks ago, when the 30-year fixed-rate mortgage suddenly spiked from 5.23% to 5.45%, the hope was that the Federal Reserve would kick into high gear to push rates back down. ) So far, no go on that front. The 30-year fixed rate has yet to fall back much; after hitting 5.7% last week it has now eased a bit to 5.5%; but that's still about  70 basis points  higher  than in April. Refinance at today’s rate and you’ll end up owing about $1,500 more a year in mortgage costs (on a $300,000 loan)  than someone who closed the deal back in April.

And it’s not as if we’re banking on rising incomes to cover these rising costs; according to that recent Conference Board survey, just 10% or respondents said they expect their income to increase  in the coming months.  So how's your confidence faring these days?

The sweeping financial reforms President Obama announced today would bring about one important victory for consumers — a new financial product safety commission.

As described in a Treasury Department white paper, the Consumer Financial Protection Agency (CFPA) would have jurisdiction over credit cards, mortgages and other payment products, which were previously regulated by various banking agencies. The agency's mission would be to ensure that consumers have a clear understanding of the financial products they use, as well as to protect them from abusive or unfair practices.

As President Obama said in today's speech, "This agency will have the power to set standards so that companies compete by offering innovative products that consumers actually want — and actually understand. Consumers will be provided information that is simple, transparent, and accurate. You'll be able to compare products and see what's best for you."

Consumer advocates are hailing the proposed agency. "By setting up a single consumer financial protection agency, the administration is ensuring that the same rules will apply to similar products across all financial institutions," says Kathleen Day, spokesperson for the Center for Responsible Lending. "Companies will not be able to shop regulators for the most favorable treatment." States would be free, however, to make laws even stricter than federal rules.

The CFPA has already received support from two influential Congressmen — Sen. Chris Dodd (D.-Conn.) and Rep. Barney Frank (D.-Mass.), who both chair key financial committees. Still, the proposed reforms  face stiff resistance from Republicans in Congress, as well as from financial services lobbying groups. The American Bankers Association, for one, has announced its oppposition.

Still, if Obama's proposals are enacted, they could make a big difference to your pocketbook. Here's a quick look at how you might benefit:

Mortgages: To make consumer choices easier, all lenders would be required to offer a "plain-vanilla" mortgages with simple terms and pricing along with other financial products. Consumers would also be entitled to receive clear disclosure about their mortgage, including the risks and benefits. Prepayment penalties would be restricted or banned.

Mortgage brokers would have to ensure that the products they sell are affordable to borrowers, as well as avoid conflicts of interest. The new rules would ban "yield spread premiums" — a form of compensation from lenders that have encouraged brokers to push higher-priced loans that are less affordable for consumers. Brokers would also be paid over time based on the loan performance, rather than a lump sum at closing.

Credit. The agency would regulate forms of consumer credit that previously fell through the cracks, such as overdraft protection plans, according to the White House proposal. For example, the CFPA might prohibit charging for overdraft coverage unless the consumer has opted in to the plan.

Help for low-income families. A key mission for the new agency would be to enforce the Community Reinvestment Act and fair lending laws. This would ensure that low-income communities have access to financial services, lending and investment.

Tell us, what do think of the notion of a Consumer Financial Protection Agency?

Last week  Senator Johnny Isakson introduced legislation that would extend a $15,000 tax credit to any and all home buyers. And I do mean any and all. The current maximum tax credit for home buyers is limited to $8,000 for first-timers with adjusted gross income below $75,000 ($150,000 for joint filers). The Republican senator from Georgia — who made his fortune as a real estate broker, I should point out — wants to swing Treasury’s doors wide open. His bill nearly doubles the maximum credit, doesn’t have an income cutoff and isn’t limited to making home-buying more affordable for first-timers.

"The first-time home buyer tax credit has made a difference," said Isakson when announcing the bill. "First-time home buyers used it and the market stabilized, but we don't have a recession in first-time home buyers. We have a recession in the move-up market.” Continued the senator, “One of the biggest problems facing the American people today is an illiquid housing market, a decline in their equity, a decline in their net worth and a depression in the housing market that we are obligated to correct if we possibly can."

There’s just one big catch.  If this legislation passed it would be at an estimated cost of more than $35 billion for taxpayers.  Maybe that’s just a rounding error in a world of trillion-dollar deficits and $700-billion-plus stimulus deals, but geez, it’s still $35 billion of taxpayer money. And it’s not about helping folks facing foreclosure or exploding mortgage rates. If this ever became law it would be a boon to the well-off that can already afford to trade up. The only way you can make a move today is if you are sitting on a wad of home equity or a nice stash of cash: You need something to come up with a down payment to satisfy  tighter lending standards. You can’t use a credit for a down payment (HUD backed away from that notion a few weeks ago.) So the big winners under Isakson’s bill would be folks who are already in good enough shape to be able to trade up anyway.

A similar provision spearheaded by Isakson made it through a Senate vote back in February, but it was one of the casualties left on the cutting room floor when Congress had to trim the stimulus package to its final $787 billion price tag. Given the steep cost of Isakson's bill it is unlikely to be fast-tracked anytime soon, but you have to give the former real estate broker chutzpah points for trying it again.

You may recall that part of the Economic Recovery and Reinvestment Act passed back in February includes a nice fat tax incentive for first-time homebuyers. The new law provides a maximum $8,000 refundable tax credit for first-time homebuyers with modified adjusted gross income of $75,000 ($150,000 for married couples filing a joint return). The hope was that the credit would push potential first time buyers already enticed by lower home prices and record-low mortgage rates to take the real estate plunge.

Well, apparently that’s not working as well as expected, or as fast as expected.

So HUD has upped the ante. Last week HUD announced that the $8,000 credit can now be used for a down payment and closing costs on an FHA-insured loan. The tweak to the program is that instead of waiting for the $8,000 credit when you file your 2009 tax return in 2010 (which doesn’t do you any good coming up with the down payment today) you can now change your tax withholding ASAP to get the $8,000 in your pocket, and FHA lenders have the green light to let you apply that money to the down payment and closing costs.

“The biggest obstacle for first-time buyers is coming up with a down payment,” said NAHB Chairman Joe Robson, a home builder from Tulsa, Okla,” in the official NAHB back slap lauding the change in policy. “We commend [HUD] Secretary Donovan for acting decisively to enable buyers to access the tax credit at the time of closing. This will help to stimulate home sales, stabilize housing and get the economy back on track.”

Hmm. I could have sworn that one of the takeaways from the great real estate wash out was that maybe, just maybe, no down payment loans aren’t such a great idea. That in fact, requiring potential buyers to have a little skin in the game is one of a few important factors in assessing the financial viability of the purchase. It gives the home buyer a vested interest in protecting an investment, that is, paying the mortgage. But with this new twist, homebuyers are essentially able to use $8,000 of taxpayer skin to finance a purchase.

Now to be sure, FHA loans have never carried big down payments; it can be as little as 3.5%, plus the cost of the FHA insurance. But bringing 3.5% to the table is still more motivation to be fiscally responsible than bringing nothing. Yet now thanks to more taxpayer largesse, a first time buyer can take out a $200,000 FHA-backed mortgage, use the tax credit to cover the 3.5% down payment ($7,000) and have another $1,000 for closing costs.

– Carla Fried

Ready to burst - again?

As private mortgage lending all but dried up over the past year, the federal government swooped in and repositioned the Federal Housing Administration’s (FHA) insured-mortgage program to pick up a lot of slack. For those who aren’t familiar, the FHA program allows folks with middling credit scores and little down payment to qualify for a loan. However, borrowers must pay an upfront mortgage insurance fee of about 1.5% of the loan amount as well as an ongoing annual fee of 0.5% each month.

Over the past year more than one-third of new mortgages are FHA-insured loans, compared to less than 3% at the peak of the real estate bubble. Moreover, in recent Senate testimony the inspector general for Housing and Urban Development said FHA-insured mortgages accounted for about 70% of loan biz in the first quarter. One of the big drivers of the increased FHA presence is the move that raised FHA-insured loan limits to as high as $729,750 in certain high cost markets. That made the program a viable option for plenty more borrowers.

But rather than a glowing example of how the federal government can step in and boost an ailing financial market, there’s growing concern that the massive role taken by FHA to buoy the ailing mortgage market, could in fact lead to yet another taxpayer bailout.

It turns out that a whole lot of borrowers getting FHA-insured loans can’t make the payments. At the end of February about 7.5% of FHA loans were “seriously delinquent;” up from 6.2% a year ago. (Seriously delinquent = 90 or more days overdue.) Not surprisingly, the reserve fund FHA keeps handy to cover bad loans has been seriously eaten into over the past year: it is down to about $13 billion today, compared to $21 billion a year ago.

This past Thursday, HUD inspector general Kenneth Donohue conceded that the trend is not encouraging. Asked about the prospect of a taxpayer bailout, Donohue sidestepped making a prediction but did say: "Based on the numbers we're seeing, I think it's going in the wrong direction," he said.

And it’s not too hard to see why. In theory-and in practice for many years-the FHA program helps folks who wouldn’t otherwise be able to afford a home, make the purchase. But the very structure of FHA-insured loans makes them a potential landmine in a economy where job security and home values are sinking. You can have a crappy credit score of just 600 or so and qualify for an FHA-insured loan at the same low interest rate that private lenders typically reserve for borrowers packing 740+ scores. And you need only a 3.5% down payment for an FHA-insured loan.

While that’s slightly more than the zero-down loans pushed by sub-prime lenders during the bubble, it’s nowhere near the 10%-20% private lenders are now requiring as insurance that borrowers have enough skin in the game to stay in the game amid declining home values. Add in the fact that the new higher loan limits make FHA-backed loans a suddenly viable option in many pricier regions and you’ve got yourself a potentially toxic brew. And as we all know, when it comes to toxic assets, it’s the taxpayer who ends up paying.

– Carla Fried

Correction: An earlier version of this post said the ongoing fee was 0.5% each month; it is an annual fee.