It was an ugly headline, even by the standards of the mortgage crisis:

• “US foreclosure filings surge 53 percent in June“

Looking a little closer though, it turns out the numbers aren’t nearly as bad as that Associated Press headline would suggest. Another example of the media piling on with a negative spin was a story suggesting that loan modification programs were simply extending mortgage pain.

Meanwhile, there were two positive signs for the mortgage market:

• Mortgage application activity rose for the second consecutive week
• Mortgage rates eased a bit in early July, after rising significantly in June

In large part, the conclusion drawn from the above depends on whether one is taking a forward-looking or backward-looking view of the market.

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One of many proposed changes to FHA lending is the implementation of risk-based pricing. Most of us are familiar with this practice if not the term for it. For example, when you get your car insurance, your rate is partially determined by your driving record, where you live, and the kind of car you drive. No one expects to pay the same for insurance as someone else. If you live in a quiet suburb, drive a 4-year-old station wagon, and the only ticket you ever got was for forgetting to feed a parking meter, your rate is lower than your big-city friend with the new ‘Vette who’s on a first-name basis with the traffic court judge. “Pay to Play” makes sense to most people in that context.

The same thing is happening with housing. Fannie Mae and Freddie Mac started the trend, charging more or requiring larger down payments for homes in declining areas, for borrowers with lower credit scores, and for financing certain types of property like manufactured housing and condo projects. The idea is to have the borrowers with the greatest chance of defaulting pay more instead of forcing everyone to absorb the cost of the rise in foreclosures.

So what does it mean to borrowers who choose an FHA loan?It depends. FHA’s costs have increased, in fact for the first time in its history the agency will be unable to cover losses caused by borrower defaults. So more money is needed, and it can come from either the taxpayers, from all FHA borrowers in the form of across-the-board fee increases, or in the form of a selective increase to those who are at higher risk of defaulting. So if you have good credit you won’t likely be hit with an increase in funding fees if this change goes through. Riskier borrowers with marginal credit histories would be expected to come up with a little more.

Don’t expect major intervention from the government in the housing crisis if the Federal Reserve Bank has any say in the matter. According to a study by Fed economist William Emmons, intervention would result in keeping home prices artificially higher, allow builders to keep turning out more dwellings, and exacerbate the existing oversupply. Allowing market forces to cause prices to fall keeps builders in check and will allow the supply to eventually match the demand for homes.

And the current rash of foreclosures? “Unpleasant but essential,” claims Mr. Emmons. Without the ability to foreclose on loans and sieze collateral, lenders would have to charge rates characteristic of unsecured debt, such as credit cards. The ability to take the house back lowers the risk of making the loan and keeps mortgage financiang less expensive for all of us.

Have any ideas about how mortgage lending could be improved? Give us your opinion here!

Mortgage news this week painted a picture of a variety of ways people are attempting to cope with the mortgage slump:

• While the housing bill continues to meander its way through Congress, it apparently was not an urgent enough issue to get done before Congress adjourned for its Fourth of July recess
• Hope Now, a mortgage industry alliance, reported that it helped 170,000 homeowners avoid foreclosure in the month of May
• Further evidence that falling behind on a mortgage need not be permanent was seen in the fact that more that 40,000 borrowers who had been behind on their mortgages caught up in May
• The week ending June 27 offered a small sign of broader resiliency in the mortgage market, as mortgage application volume recovered slightly from the year-to-date low set during the prior week

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Passage of the new housing bill being pushed through Congress has stalled because of one senator’s insistence on adding an energy bill he came up with to the package. The bill, targetted for submission to the White House before July 4th, will have to wait until after the holiday. And homeowners, home buyers, and other players in the housing market will have to wait and see what shakes out.

One provision involves the creation of an $8,000 tax credit for first-time home buyers. Credits are good–better than deductions, because they offset your tax obligation dollar-for-dollar and put real money in your pocket. If this provision survives and makes it into the bill, first timers could enjoy unprecedented opportunity to achieve “homeowner” status. This would also be a boon to sellers in distressed markets. By making it easier to buy a home, the credit could stimulate the housing market as well as improve the financial health (and thus decrease the default risk) of new borrowers.

So take a look at your local housing market. Check out mortgage prequalification calculators. Find a real estate agent and a lender you trust. If a housing bill passes with that credit, your housing market may swarm with bargain-hunting first-timers. Why not do some homework ahead of time, be able to make a stronger (preapproved) offer, and get the jump on your competition?