The federal government’s homebuyer tax credit has been a boon for both the housing industry and the housing market, causing a surge in sales over the last few months. In fact, the program has been such a success, that some states are now introducing their own versions, and stakeholders are lobbying both to expand the federal program and to extend its deadline.

In its current form, the “tax credit is equal to 10 percent of the home’s price, up to $8,000. So, for example, if a buyer is paying $50,000 for a house, the credit would be worth $5,000. The tax credit never has to be repaid. Last year, Congress created a different tax credit, but that one was effectively an interest-free loan. This money involves no repayment or interest…Buyers will get the money when they claim the tax credit while filing their federal income taxes for 2009.” If a taxpayer owes less than the tax credit he is due, then he is still entitled to receive the difference.

Given that the program is slated to expire on November 30, several lawmakers have already moved to legislate an extension. In fact, there are two bills currently winding their respective ways through Congress: “H.R. 101, The Economic Recovery Through Responsible Homeownership Act of 2009, which would provide up to $10,000 in tax breaks to any homebuyer who makes a qualifying down payment and H.R. 1245, the Homebuyer Tax Credit Act of 2009, which would provide a tax credit of up to $15,000.” The Senate is currently working on developing similar legislation.

Another change could affect borrower eligibility. With the current credit, “Congress set an income limit for the full credit. For a single person, it’s $75,000 and for married couples, it’s double that.” With the extension, it’s possible that these income limitations (and maybe even the requirement that the credit be applied towards a first-time home purchase) could be eliminated, in order to make the credit available to more people.

Meanwhile, the federal government is not the only one working overtime on this issue. New York recently became the first state (that I know of) to implement a similiar program, which “would allow home buyers to take a dollar-for-dollar deduction of 20 percent of mortgage interest paid, Gov. David A. Patterson and other state officials announced. The remaining 80 percent of the mortgage interest paid for the year will be treated as usual, as itemized tax deductions.” For some borrowers, this could amount to savings in excess of $1,000 a year. Not a bad deal, especially when you factor in the federal money. It will be interesting to see if other states follow suit, and we’ll keep you posted as this story unfolds.

Convention wisdom has always held that its best to enter into retirement without any outstanding debt, especially not a mortgage. That wisdom has been turned on its head as a result of the financial crisis, which devastated the savings of those approaching, or already in retirement. “Now, many people retire while still paying that monthly home-loan bill,” reports one source.

Despite the crisis, however, it turns out that common sense still applies: “It’s better to pay down your mortgage than to carry it into retirement. Or at least it is if you have the money set aside in a taxable or tax-deferred account.” This true for a couple of reasons. First, the return that you can expect to earn on your (retirement) savings is probably well below your mortgage rate, which implies that you are actually losing money by not repaying your mortgage. As a general rule of thumb, it’s always better to pay down your debt, so that you know exactly where you stand in your personal financial situation.

If you can’t afford to repay your mortgage before retiring, there is another option: a reverse mortgage. While there are several variations, reverse mortgages essentially enable you to draw-down the equity in your house, eventually freezing it at a certain level. Unlike with a conventional mortgage, however, there is virtually no risk of foreclosure. “Reverse mortgages have traditionally been chosen by older Americans who can’t cover everyday living expenses or who otherwise need cash for such things as long-term care premiums, home healthcare services or home improvements.”

Of course, there are drawbacks. Namely, the costs can be significant and the mortgages are often deliberately complicated. “Borrowers should consider discussing the appropriateness of a reverse mortgage given their current financial situation and the other options available to them before applying for a reverse mortgage.” There is also the risk that receiving payments in connection with a reverse mortgage could render you ineligible for certain federal retirement programs.

But the benefits are just as manifold: “You can take your payment as a lump sum, a monthly cash payout, a line of credit held in reserve or a combination of all three. No repayment is due until the last homeowner moves out or dies, at which point the home can be sold to pay off the debt. The loan repayment can never exceed the home’s market value (even if it declines), absolving your heirs of any liability.” Portability means that you can take your reverse mortgage with you if you decide to move. Most importantly, you can use it to pay off your current mortgage, and move into retirement debt-free!

According to a new report by Deutsche Bank, and investment firm, the number of borrowers with underwater mortgages – those who owe more on their mortgage than their homes are worth – is projected to skyrocket in the next few years. This proportion, “will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market.”

Deutsche Bank didn’t offer much in the way of context/analysis for its figures, which is somewhat surprising since several indicators of the housing market have begun to tick up. Regardless, the projections are eye-opening, to say the least. Everyone already knows about the problems affecting the riskiest class of mortgages. With regard to subprime loans, “69 percent will be underwater in 2011, up from 50 percent in March, Deutsche said. Of option adjustable-rate mortgages — which cut payments by allowing principal balances to rise — 89 percent will be underwater in 2011, up from 77 percent.”

Those following the housing market probably would have also anticipated that some of the most distressed regional markets would see a rising percentage of underwater mortgages, many of which were no doubt funded using the risky mortgages cited above. For example, “Las Vegas and parts of Florida and California will see 90 percent or more of their loans underwater by 2011.”

Few, however, would have expected such dire predictions for prime loans, which “make up two-thirds of mortgages, and are typically less risky because of stringent requirements.” As a result of a projected 14% price decline up to  41% of prime conforming loans may be characterized by negative equity by 2011. “Forty-six percent of prime jumbo loans will be larger than their properties’ value, up from 29 percent, it said.”

Most troubling, perhaps, is the notion that such borrowers won’t receive a break from lenders, nor from the government. Currently, the practice of reducing one’s mortgage (known as a cram-down) as a result of personal bankruptcy, remains taboo as a result of industry pressure. “House Financial Services Committee chairman Barney Frank (D-Mass.) has already warned that if more loans aren’t worked out, he’ll renew the push to allow bankruptcy judges to order reductions in mortgage amounts.”

In fact, government legislation appears to be moving in the opposite direction. Arizona, for example, is contemplating changing its laws on deficiency judgements, which currently serve to prevent a lender that “forecloses on a home mortgage to recover the balance of what is owed the lender if the foreclosure sale doesn’t produce the full amount…The changes, which haven’t yet taken effect, impose new eligibility requirements to qualify for protection against a deficiency judgment. One is that the borrower must have lived in the property for six consecutive months.” If this takes effect, then borrowers that walk away from their underwater mortgages might see the balance stay with them forever. What’s next – a return to the days of debtor prisons?

Mortgage rates have remained relatively stable. How has this trickled down into the housing market? In a nutshell, housing prices are stabilizing, but it’s unclear whether the market has yet to bottom. In addition, national averages mask regional differences, and soft spots remain in certain markets, and in high-end housing.

Let’s zoom in on some specific data points: “The Standard & Poor’s/Case-Shiller price index, a closely watched gauge, showed that single-family-home prices rose 0.5 percent from April to May, the first monthly increase since 2006…The federal government reported an 11 percent rise in new-home sales from May to June, the largest monthly gain in nine years. Sales of previously owned homes jumped for the third straight month, up 3.6 percent in June.” Meanwhile, “The median sales price was $206,200, down from $234,300 a year and $219,000 from May.”

At face value, these statistics seem to portray a market that has entered the recovery stage, but they should be interpreted in context. First of all, “Home sales quite often jump in June, the height of the spring selling season.” This June was particularly bountiful because of the federal government, which is offering an $8,000 tax credit for first time buyers, and implemented a de facto moratorium on foreclosures.

However, given the seasonality of the housing market and the fact that both of these government programs are slated to expire soon, “It makes more sense to compare them [home sales] with the same month a year ago. That comparison is less kind — sales were down 21.3% from June of 2008. Seasonally unadjusted data show a total of 36,000 new homes were sold last month, the lowest June total since 1982.” It should also be pointed out that the data is derived from a survey – rather than from actual numbers- and carries a margin of error, such that the true figure could very well be negative.

There are also significant regional disparities contained in these numbers. “Sales were strongest in the Midwest, where they jumped 43 percent from May’s total. Sales climbed 29 percent in the Northeast and 23 percent in the West. They declined slightly in the South.” In California, Florida, Nevada, and Arizona, prices continue to fall, and foreclosure rates are rising.

The high-end market, meanwhile, continues to tank, due mainly to a delayed bursting of the bubble and changes in lending standards. “The supply of unsold homes priced above $750,000 swelled to around 17 months in June, up from a 14.5-month backlog one year ago. A recent forecast by analysts at J.P. Morgan Chase & Co. said it would take until at least 2012 for the expensive-home market to recover and that peak-to-trough declines could surpass 60%, compared to 40% for the rest of the market.”

It’s quite obvious that from an historical standpoint, then, the housing market remains quite depressed. But what about the future? “ ‘The freefall is over,’ says Dean Baker of the Center for Economic and Policy Research.” Warren Buffet agrees: “Most of the problems in the housing market will be over in 18 months or something like that.” Alan Greenspan, however, thinks that “Home prices had stabilized only temporarily. ‘It is possible that could get a second wave down.’ ” Other analysts point out that for as long as the overall economy – specifically the employment situation – remains weak, the housing market will fail to recover. In addition, should interest rates rise suddenly and/or another wave of foreclosed properties hit the market, the market could certainly trend downward.