This weekend it was announced that Lehman Brothers’ is filing bankruptcy and Merrill Lynch’s is being sold to Bank of America for a reportedly 50 billion dollars. Wow! I find it hard to believe myself. Well this is all very dissrupting for the financial markets but what does that mean for you looking for better mortgage rates?  Kimberly Palmer of usnews.com believes it will lower interest rates.

 ”The prices on 10-year notes have already gone up—which means their yields have gone down—since the weekend’s announcements. Since 30-year mortgage rates tend to follow the yield of 10-year treasury notes, those rates have also fallen, explains banking consultant Bert Ely.” says Palmer.

I would watch our sites mortgage rates on a regular basis. Today’s 30 year fixed is 5.78%, It was 6.08% last week, a significant decrease. The same rate was around the 6.5% area in August.

Last week mortgage applications were down 15.3% according to a survey by the Mortgage Bankers Association. Because of this drop the index was down to 502.3 from 593.3 the previous week. Results were adjusted to take Memorial Day into consideration.

Refinance levels also dropped 25.7%. This past week refinance applications accounted for only 40.6% of the total mortgage applications, down from 46.1% the previous week.

Many believe these declines are due to the higher mortgage rates.

Following a string of banking executives doing the same due to the subprime lending crisis, Chief Executive Officer Kerry Killinger of Washington Mutual, Inc. will step down as chairman. This move occurs after shares dropped 80% in the past year and the company suffered a reported $3 billion loss in the past two quarters.

Stephen Frank will be the replacement after shareholders voted in April to remove Killinger. Christopher Bingaman, who helps oversee $5.1 billion including 3 million Washington Mutual shares at Diamond Hill Investment Group in Cincinnati said, “They’re doing the things they’ve been forced to do as a result of decisions and business practices that they made years ago. We’re certainly favorable on the split.”

Washington Mutual, Inc is the biggest savings and loan in the U.S. and has cut its dividends twice recently. They’ve reported that the company may lose up to $19 billion through 2012 due to home loans.

Home loan applications fell by 14.2% last week according to the Mortgage Bankers Association, bringing their seasonally adjusted index down from 743.4 to 637.6.

Even though Spring is typically a strong season for home sales the subprime mortgage mess is making this year a tough one. Mortgage rates themselves are a strong factor on whether a potential homebuyer will sign a mortgage or not. Since the average rates are up and it is more difficult to be approved less people are applying. The Mortgage Bankers Association also reported that refinancing applications dropped 20.2% to 2,286.3.

Fannie Mae and Freddie Mac executives recently reported to Congress that they were lowering interest rates on some jumbo mortgages. This was in response to Rep. Barney Frank, a Mass. Dem, who inquired as to why jumbo mortgages have stayed expensive.

Jumbo mortgages are above the normal mortgage loan limit of $417,000. These rates rose dramatically in 2007, hurting housing demand  in expensive areas such as the east coast and California where homes easily exceed $500,000. Some of the reason these loans are more expensive is that they are likely to be refinanced more quickly when interest rates fall, which make them less attractive investments.

The lowered rates have started closing the gap however. Last week standard mortgage rates were at 6.17% while jumbo rates were only .44% higher at 6.61%. This is comparable to March when the jumbo loans were up to 1.30% higher than standard loans. It is believed that the aggressive purchase of jumbo loans by Freddie Mac and Fannie Mae in recent weeks have lowered the rates.

According to Freddie Mac’s survey released on Thursday, 30-year, fixed-rate mortgages are down again for the third week in a row. They have fallen from 6.01% to 5.98%. 15-year, fixed-rate mortgages are also down from 5.60% to 5.55%.

Adjustable-rate mortgage, however, were on the rise. 5-year ARMs were at 5.61%, up from 5.57% last week. One-year ARMs rose from 5.18% to 5.24%.

Frank Nothaft, Freddie Mac vice president and chief economist, said,  “Interest rates for fixed-rate mortgages fell slightly this week on news of both weaker industrial production in April and consumer sentiment falling in May to its lowest level since June 1980. ARM rates, however, rose slightly on market forecasts that the Federal Reserve may not pursue any more rate cuts over the near term.”

HSBC owned, online and telephone lender First Direct has announced that they will begin offering mortgages to borrowers again on Monday. The company had withdrawn from the market six weeks ago because of high demand.

The reason for the suspension of First Direct’s mortgage offers to borrowers without existing accounts at the beginning of April was that they had a backlog of application approvals. The high demand was due to rivals raising their rates and withdrawing offers because of the recent credit crunch. Those have now been resolved and a 2-year, fixed rate of 5.76% plus fees will now be offered with at least a 20% deposit.

Although short sales share the same name in the stock market they aren’t similar in real estate. The term in real estate refers to a transaction where a homeowner sells a home to a buyer for less than the amount owed on a mortgage. Then the bank or other lender may accept the shorted proceeds to cover the note. This deal is also known as short payoffs and is becoming increasingly more popular.

The advantages for lenders here include the fact that they probably won’t lose as much money as they would in a foreclosure. Homeowners’ advantage is that they avoid foreclosure and they won’t be pursued for losses suffered by the lender.

Usually under normal circumstances a homeowner with a short sale would have to pay a lot of taxes because under federal law any type of debt forgiveness is treated as taxable income. However, the Mortgage Forgiveness Debt Relief Act of 2007 changed this law to make these transactions tax free. According to the IRS, taxpayers may exclude up to $2 million in forgiven debt from their income, provided the debt was on their principal place of residence. The limit is $1 million for a married person filing separately. For taxpayers, it’s all on Form 982 from the IRS.

This tax change does only apply to a principal home though. You cannot take advantage of it for vacation homes, investment properties, or other real-estate assets.

According to a report released on Thursday by mortgage giant Freddie Mac, mortgage rates are down for the second week in a row. 30-year, fixed-rate mortgages are down to 6.01% from 6.05% last week. Five-year, adjustable-rate mortgages fell to 5.57% from 5.67%. Finally, one-year, adjustable-rate mortgages also dropped from 5.29% to 5.18%.

Meanwhile 15-year, fixed-rate mortgages stayed the same at 5.60%

Frank Nothaft, Freddie Mac vice president and chief economist said in a statement, “Recent remarks by Federal Reserve officials, which partly bolstered optimism that financial markets will recover later this year, helped mortgage rates ease up a little this week. Despite the bleak housing market, there was positive news on the overall state of the economy. Retail sales excluding automobiles rose 0.5 percent in April, over twice that of market forecasts, and there was a significant upward revision in March’s figures as well. Also, the consumer price index for April rose less than expected, allaying some market concerns of inflation taking hold.”

Jumbo-conforming mortgages were created by Congress to make homes in high priced areas more affordable. The people living in those areas may be breathing sighs of relief as those rates are beginning to drop. Many lenders cut their rates by 1/2% point late last week on the jumbo-conforming loans (loans that can be guaranteed by Freddie Mac or Fannie Mae and are between $417,000 and $729,750.) This rate cut now makes jumbo loans almost as cheap as standard conforming loans below $417,000

Still, getting a jumbo-conforming loan is harder than getting a standard loan due to stricter criteria. Generally Freddie Mac and Fannie Mae require higher credit scores, larger down payments, better income documentation and lower debt-to-income ratios on these loans.

The point of lowering the rates then was mainly to help people with equity in their home refinance an old jumbo loan into a cheaper rate according to many loan brokers.