The nationwide average interest rate for 30-year mortgage loans featuring fixed rate on a thirty year term was 5.19% for the week ending December 18, the lowest level since Freddie Mac began the survey in 1971.  First mortgage rates were down from last week when it averaged 5.47 %.  A year ago, the average for mortgage loans was 6.14%.  Second mortgage rates still remain a few points higher than interest rates for 1^st trust deeds.  Amid the foreclosure crisis, second mortgages remain a high risk for mortgage lenders and investors.

The fifteen-year fixed-rate mortgage averaged 4.92 %, down from 5.2 % last week and 5.79 % a year ago. The fifteen-year mortgage rates have not been lower since April 1, 2004, when they averaged 4.84 %.  According to a statement by Freddie Mac chief economist, Frank Nothaft “The rate drop was driven by the Federal Reserve announcement on December 16th, when it cut the federal funds target to a record low and stated it stood ready to expand the buying of mortgage loan assets as conditions warrant.”

Five-year Treasury-indexed hybrid adjustable-rate home loans averaged 5.60% this week, which is lower than the previous week that averaged 5.82%. A year ago, the five-year ARM averaged 5.90%.  One-year Treasury-indexed ARMs averaged 4.94% this week, down from last week when it averaged 5.09%. At this time last year, the one-year ARM averaged 5.51%.

Some banks have had an uneasy relationship with Fannie and Freddie, would like to see them disappear, at least in their current form. One idea being discussed among bankers is to replace Fannie and Freddie with several lender-owned cooperatives that would package mortgage loans into securities. Under this idea, the U.S. Treasury would get fees for backing up those securities if losses reached catastrophic levels.  In prepared remarks for a speech in Detroit on Tuesday, Bank of America Corp. Chief Executive Kenneth Lewis called for scrapping the business model of Fannie and Freddie. He said the U.S. should “move in the direction of a system that relies more on private-sector institutions,” without government guarantees, to channel money from investors to home mortgage lenders.

Watch Steve Forbes Video Discussing Fannie Mae, Freddie Mac & the Mortgage Meltdown.

www.youtube.com/watch?v=vqBquI2GooU

In the short term, though, Mr. Lewis said the government should make its backing of Fannie and Freddie “more explicit” to boost investor confidence and push down mortgage interest rates.  The Mortgage Bankers Association, a trade group, will host a meeting of lenders, real-estate brokers and academics in Washington on Wednesday to discuss how the two companies might be reshaped and how the U.S. could best ensure a steady flow of money into home mortgages.  The meeting comes amid concern that the $11 trillion U.S. residential-mortgage market needs an overhaul rather than a few tweaks.

Bankers have accused Fannie and Freddie of grabbing more than their fair share of profits from the mortgage business, while Fannie and Freddie officials have insisted that banks wanted to gouge consumers with higher mortgage rates.  Any attempt to scrap Fannie and Freddie entirely is sure to lead to a debate. The home builders and the National Association of Realtors both oppose the idea of relying totally on private institutions to provide money for mortgages.  “In times of crisis, the government really needs to step in,” said Lawrence Yun, chief economist of the Realtors. Mr. Howard, of the home-builders group, opposes the idea of nationalizing them, saying that a government agency wouldn’t be nimble enough to keep up with market needs. But he said it might make sense to treat them as tightly regulated public utility companies or as cooperatives owned by mortgage lenders.

The uncertainty over how the companies will be reshaped and even whether they will continue to exist has made many investors wary of buying bonds issued by Fannie and Freddie.  Treasury Secretary Henry Paulson last week said investors can “bank on” the government’s promises to ensure that Fannie and Freddie will pay their obligations. But there is no explicit federal guarantee of Fannie and Freddie debt, and investors, especially those overseas, are less willing than in the past to accept “implied” guarantees or oral promises.  Because of the ambiguity over government backing for them, investors are demanding higher yields on their bonds, particularly those that mature in 12 months or more. On Tuesday, yields on two-year Fannie and Freddie bonds were 1.67 percentage points above those on comparable Treasury bonds, compared with a spread of just 0.29 point in mid-2007, according to FTN Financial Capital Markets.

On Sept. 6, federal regulators seized control of the management of Fannie and Freddie. At that time, the Treasury pledged to provide as much as $100 billion of capital to each company in exchange for preferred stock. Last week, Freddie said it needs a $13.8 billion cash injection from the Treasury, and Fannie said it may need Treasury funds by year end.  FHA will be releasing a home loan modification product next month to help distressed homeowners.

For the third quarter, Fannie and Freddie reported combined losses of about $54 billion, largely due to the elimination of tax credits no longer expected to be usable.  The incoming Obama administration hasn’t announced any plan for reformulating Fannie and Freddie, though President-elect Barack Obama referred to them earlier this year as a “weird blend” of the public and private sectors.