In addition, some banks estimate that they are able to cut their losses in foreclosure as opposed to short sales, particularly in mortgages guaranteed by government agencies like Fannie Mae, Freddie Mac or the Federal Housing Administration.

In Florida, real estate professional Peter Murphy said that despite much higher price offers from buyers interested in short sales, lenders still foreclose on the desired properties, even if the foreclosure prices are much lower than the short sale offers.

Murphy added that last year, properties sold in short sales were priced at $68 per square foot while real estate owned properties were priced at a much lower price of $55 per square foot.

He also added that in order for home prices to stabilize, banks must approve more short sales to preserve prices. He explained that while bank owned homes are being sold at around 54 percent of conventional sale prices, short sales can be closed at about 80 percent of conventional sale price levels.

However, despite the record number of distressed homeowners asking permission for short sales from financial companies, these requests are not being addressed. Typically, banks take an average of 298 days to complete a short sale, but when they foreclose, they complete the process quickly, just slowing the process a little to comply with foreclosure laws, according to realtors in Florida.

The case of Texas homeowner Chandra Persaud is illustrative of the attitude of banks toward distressed sales. At the time Persaud was in default on her loan, she still owned $295,000 on the $350,000 she borrowed in 2005.

She negotiated a short sale offer of $240,000 in cash with her lender Bank of America, but to her frustration, the bank still pursued foreclosure action on the property and sold it later for only $205,000, an amount $35,000 lower than her cash short sale offer.

According to Bank of America spokesperson Rick Simon, short sales require complex transactions and take a long time to carry out. They also involve several parties, such as agents, sellers, buyers, servicers, investors, insurers and subordinate lien owners.

Financial companies recognize short sales as a tool to prevent foreclosure, according to Simon, but short sales consume a lot of time and effort particularly in an environment of high volumes of distressed properties.

For the period from January to September this year, Freddie Mac has returned around $2.7 billion worth of single-family mortgage loans to lenders, more than twice the $1.2 billion worth of loans returned last year. Freddie and Fannie do not directly provide home loans, but they purchase or guarantee home loans from lenders.

During the same period, the number of real-estate owned properties in Fannie Mae books increased to 98,428 units, an increase from the 94,652 units repossessed after foreclosure in 2008. Last year, Fannie Mae returned about one-fourth of these REO to lenders and expects to return about the same percentage to lenders this year and next year.

Major lenders, such as Bank of America, Wells Fargo, Citigroup and J.P. Morgan Chase, have been rejecting some of the loans or properties being returned by Fannie and Freddie because most of the mortgages were provided to creditworthy borrowers and most were fixed-rate 30-year mortgages, but Freddie and Fannie insist that every mortgage company needs to re-examine its underwriting practices and the extensive guidelines provided by Freddie and Fannie Mae.

Michael Cosgrove, spokesperson for Freddie Mac, said that Freddie has been looking for ways to reduce potential losses and has been examining guaranteed loans more thoroughly.

According to Inside Mortgage Finance, 3 million mortgage loans were in default or in foreclosure as of September 30, which is equivalent to $750 billion, assuming an average loan amount of $250,000.

Maria Brewster, head of the Centralized Repurchase Team of Fannie Mae, explained that the decision of Fannie to return poorly underwritten loans will force lenders to become accountable for their lending practices and will spur them to clean up their operations. Brewster also added that Fannie and Freddie, which are controlled by the federal government and funded by taxpayers, should not be made to pay for the mistakes of lenders.

In the third quarter, Wells Fargo increased its reserves for loan repurchase by $146 million in anticipation of more defaults and repurchase demands. Similarly, J.P. Morgan allocated $1.1 billion to meet repurchase demands from investors.

Bank of America, meanwhile, stated that it has repurchased $922 million of mortgage loans which were deemed to be faulty for the period January to September.

One mortgage company that failed due to inadequate reserves for faulty loan repurchase was New Century Financial. It collapsed when it overstated its financial condition and failed to repurchase faulty loans.

The FHA has been insuring loans not only in high cost neighborhoods; it has also been insuring mortgages covering four-unit residential units purchased with very low down payments.

In a particular home loan criticized by the New York Times, three technology professionals teamed up and bought a two-unit apartment worth almost $1 million with a loan insured by FHA and with only a $33,000 down payment.

Critics said that it would be easier for the borrowers to walk out on their FHA loan if they face difficulties because they invested only $33,000.

Based on data from the Mortgage Bankers of America, the default rate for loans taken out to buy 1-to-4-unit residential properties increased to 9.6 percent of all home loans in the July-September 2009, an increase of 40 points from the April-June quarter and an increase of 265 points from last year’s third quarter.

Jay Brinkmann, chief economist of the MBA, said that the default rate for FHA loan mortgage loans has risen despite a significant rise in approved FHA loans. Over the past 12 months, the number of home loans guaranteed by FHA rose by around 1.1 million loans, increasing the denominator for computing the default and foreclosure rates.

But still, according to Brinkmann, the default rate increased. He further explained that if the newly guaranteed home loans were not the ones getting delinquent, the rate of foreclosure would be higher at 1.76 percent, above 1.31 percent if the new loans were considered.

The MBA also reported that one out of every 6 FHA borrowers was in default on their home loans as of the three-month period ended September.

In the 1930s, FHA home loans were introduced to enable low-income families unable to afford the typical 20-percent down payments to own homes. They paid a higher insurance premium, but their down payments could be lowered to just 3.5 percent.

During this recession, the FHA loan limits were temporarily increased to stimulate the declining housing market, increasing conforming limits to $729,750 for single-family homes and to $934,200 for two-unit residential properties.

In California, which has the biggest number of foreclosure homes in the country, there are over 107,000 loan mortgage accounts guaranteed by the FHA this year, many of which are expected to default and go into foreclosure.

According to the Mortgage Bankers Association, rates for fixed-rate 30-year mortgage loans dropped below 5 percent – the first time rates fell sharply over the past 4 weeks.

The MBA also reported that the volume of mortgage loan and refinancing applications rose during the week ended October 30 by 8.2 percent to an adjusted index of 608.3 because of the drop in mortgage rates.

MBA officers explained that the 5-percent level has become a significant point among consumers, sparking home loan and refinancing applications if rates fall below it and temporarily slowing down loan applications if rates rise substantially above it.

The struggling housing market has been showing some signs of nearing stability after three years of decline, but it is still vulnerable to movements in other areas of the economy.

Ronald Temple, research co-director at New York-based Lazard Asset Management, said that it is still too early to pronounce a recovery in the housing market and it is still difficult to determine if the federal government’s intervention in the market has been effective.

Temple explained that large numbers of foreclosures will still enter the market over the coming months. He added that although currently, rates are attractive, pushing many borrowers to refinance mortgage loans and buyers to take out home loans, mortgage rates will likely increase.

Meanwhile, the National Association of Realtors said that pending sales of existing homes in September increased to their highest point in almost three years largely due to the expiration of the first time buyer tax credit at the end of November. The $8,000 federal tax credit, however, is likely to be extended based on statements from legislators over the past weeks.

According to several U.S. representatives, they will likely support a Senate proposal to extend the tax credit program through April next year. They recognize that the federal tax credit has been contributing significantly to the reduction of foreclosure homes in the market and the rejuvenation of home sales.

Additionally, the Federal Reserve assured the public that it will continue to focus on keeping home loan rates low so more Americans can buy homes or refinance their loans.

Based on MBA data, the number of borrowers who submitted loan refinancing applications increased by 14.5 percent to an adjusted index of 2,693.7 as rates were kept below 5 percent to encourage borrowers to refinance mortgage loans.

So far, the refinancing program has helped no more than 3 percent of its targeted number of struggling borrowers, prompting industry experts to say that the program is not enough to help many distressed homeowners avoid foreclosures.

Experts said that the poor performance of the program is an indication of how difficult it is to help the increasing number of homeowners who owe more on their mortgage than the total value of their houses.

The refinancing program is one of the major components of the federal government’s efforts to abate the growing foreclosure problem, stabilize and strengthen the housing market. However, the refinancing program has received a mediocre public attention compared with its companion program, the mortgage loans modification which motivates lenders to modify troubled loans to make them affordable for borrowers who are at risk of foreclosures.

The refinancing program is geared towards struggling borrowers who owe more on their mortgage than the total value of their homes. The program works on the premise that helping struggling borrowers refinance their loans into affordable terms would save them from future troubles.

The program involves suspending the traditional equity requirement for refinancing in an effort to help them stave off foreclosure. Those who are eligible include homeowners who have loans guaranteed by mortgage financiers, Federal National Mortgage Association and Federal Home Loan Mortgage Corp.

So far, the program has helped nearly 130,000 out of the target 5 million borrowers that the Obama Administration has identified as eligible for the program.

According to market data, one third of the total number of borrowers in the country have mortgages greater than the value of their properties. In Washington, nearly 34 percent of homeowners had zero equity in the first quarter of this year. The problem of lack of equity is more acute for homeowners who took out mortgages in 2007 and 2006, with 60 percent of them having properties that are worth less than their mortgages.

Industry experts said that struggling borrowers do not find mortgage loans refinancing an attractive option because they end up still owing more on their mortgage than the value of their properties and could only regain equity after giving payments for several years.

In interviews and in speeches delivered in various places of the country, the president and his advisers have been expressing their disappointment with the big banks they have helped when they were about to collapse. The banks, led by the American Bankers Association and the Financial Services Roundtable, have been campaigning against the administration’s Consumer Financial Protection Agency proposal.

Last week in San Francisco, Obama told his audience at a fundraiser for the Democratic Party that financial laws need to be made stronger to prevent banks and other financial firms from playing with the system and hurting ordinary Americans.

Lawrence Summers, head of the National Economic Council, reiterated Obama’s call when he spoke in New York at a meeting held by The Economist. He said that every financial institution existing in the U.S. has benefited from taxpayer money directly or indirectly.

On talk shows, several Obama advisers all pointed out the need for banks and other financial services providers to support the revamp of financial industry laws. Senior adviser David Axelrod talked about the need for banks to increase their lending while Chief of Staff Rahm Emanuel talked about his frustration at banks that do not understand the need to prevent another crisis from happening.

In response, the top executives of the large banks explained their position. Lloyd Blankfein, CEO and chairman of Goldman Sachs, said he did not expect that the government funds his firm received included a kind of pressure. Goldman Sachs has already repaid the $10 billion it has received from the government last year.

Jamie Dimon, CEO and chairman of JPMorgan, said in a letter read by his spokesperson that financial policies should be based on a thorough examination of the crisis and not on political agendas. JPMorgan has also repaid the $25 billion it has received from the Treasury.

Citigroup and Bank of America received $45 billion each last year and have not repaid. While Goldman Sachs and JPMorgan announced profits in the third quarter, BofA announced a loss of $1 billion during the quarter.

On the whole, what the Obama administration is expecting from financial services providers is to give back what is due the taxpayers that bailed them out during the crisis by supporting legislation that protects taxpayers.

The form used by mortgage lenders to check income tax filings with the Internal Revenue Service is IRS Form 4506-T. This form, which is filled out and signed by the loan applicant, authorizes the loan officer or the mortgage investor to obtain electronic copies of the federal income tax returns filed by the borrower.

According to Fannie Mae, it instructed mortgage lenders to check the tax filings of borrowers twice to ensure that applicants are telling the truth about their incomes, preventing fraud, loan losses and other related problems.

During the boom years, many mortgage lenders did not require home loan applicants to submit copies of their income tax returns. They figured that too many documentary requirements will discourage potential borrowers from pursuing their home loan applications. Many borrowers then took advantage of lax lending procedures, borrowing higher loan amounts to buy bigger houses.

When foreclosures battered mortgage companies, they soon realized that most of the foreclosed properties in their loan portfolios were the properties covered by the no-documentation loans they had provided.

Now, even if borrowers submit copies of their past income tax returns, lenders are still required by Fannie Mae to get electronic copies from the IRS using the 4506-T form.

The IRS, in response, has decided to lower the price of 4506-T electric transcripts to $2.25, half of the previous $4.50 fee charged. The IRS, which is prohibited from making money from income verification services, would be earning higher revenues because of the expected rise in demand for income tax checks if it did not reduce the fees.

Curtis Knuth, a top executive of NCS Inc. which supplies the mortgage sector with Form 4506-T, said the fee reduction is a big help for mortgage lenders complying with the Fannie Mae requirement.

Now that the Form 4506-T will be used more intensively, tax officials and other concerned parties are advising home loan applicants to pay more attention to the information they put on the form. Borrowers are advised to read the IRS instructions, to date their signature and to limit the return transcript years only to the tax years needed by mortgage companies.

The main reason for this is that banks and lending institutions are now more cautious about releasing their money to people. They have higher standards and stricter requirements. Here are some tips for you on how you can approach a bank for your personal loan:

You should also be able to evaluate if you really need to apply for a bank loan. If you think that you can instead save up for the expenses you need, then it would be best to just do that instead.

Last month, unemployment increased to 9.8 percent. This would create a long lag before Americans create a new demand for houses again. As of now, one fourth of all sub-prime mortgages are delinquent in terms of status.

According to Ivy Zelman, an analyst of the Zelman & Associates, the increasing supply of cheap houses brought about by foreclosure is the elephant in the room. It is to be blamed for the troubles that Americans are having with their financial mortgage loans.

The number of foreclosed properties continues to rise, as more and more homeowners are losing their ability to finance their houses. Around 5.8 million home mortgages are in danger of leading to foreclosure. This threatens to affect sales of single-family houses in the country.

Although a lot of people are hopeful that the real estate market had already reached its bottom and is already on its way up, it is still too early to tell. In fact, there can be difficulties for banks to deal with their books on home mortgages. To add to this, it is also difficult to expect that the demand for houses would rise soon.

Companies may be hesitant in hiring new people, even if the US economy is already showing signs of recovery. Consumers are afraid to take risks and to spend the money that they have, since they are in danger of being retrenched. Factors that could affect the real estate and housing market revolve around the strength and capacity of consumers.

Even if low interest rates could benefit the homeowner or the borrower, it poses a lot of problems for banks and for other financial institutions. Also, the dollar suffers from this situation and continues to weaken and lose its value.

Although some economic aspects are benefiting from this, the real estate market and those that are dealing with financial mortgage loans would find it difficult to recover.

Lenders however, such as Wells Fargo, reiterate that they follow responsible and fair lending practices and that they provide home equity loans depending on the value of the home and the available amount of equity.

Housing analysts contend that the easy availability of home equity loans during the housing boom contributed to the difficulties of homeowners in getting loan modifications to enable them to save their homes. Paying a secondary mortgage while keeping current on an increasing primary mortgage has become an impossible burden for many homeowners to bear.

Across the country in 2008, a total of $116 billion in home equity loans and home equity lines of credit were provided by lenders to homeowners despite efforts by lenders to control lending. Total home equity loans and HELOCs in 2007 reached $350 billion, according to an Inside Mortgage Finance report.

California homeowners accounted for about 25 percent of all current home equity loans and HELOCs.

According to officers of Inside Mortgage, lenders since early 2008 have been suspending HELOCs and have been rejecting home equity loan applications because of two reasons: the sharp decline in home values and the deteriorating financial situations of homeowners.

During these times of unemployment and reduced income, it seems unwise to put oneself in more debts, such as getting home equity loans.

But if a homeowner has good credit, has stable employment and has been able to pay his home loan without high level of difficulty, getting a home loan equity is still a wise decision if the purpose of the loan makes sense.

One valid reason is college tuition for one’s child, especially for someone who has just one more year to go before graduation. Getting a home equity loan rather than a college loan or other types of loan is often better because of the lower interest rate and the tax deduction advantage of home equity loans.