Negotiations over an unprecedented $700 billion bailout opened on Sunday between Congress and the administration of President George W. Bush. The idea of this intervention is to revive the U.S. financial system, which includes a plan to sweep away the unpaid loans that are choking banks and blocking the flow of money to borrowers.

Mortgage rates remained low, but home lending guidelines continue to tighten.  Most brokers are reporting that FHA home loans have taken 75% of the market share.  According to Nationwide Lender Jeff Moran, “FHA mortgage products are most attractive because they underwrite loans beyond the credit scores.”  FHA mortgage guidelines promote fair lending with underwriting practices that encourage qualifications based on compensating factors like, equity, assets, benefits and likelihood of the proposed borrower making the loan payment on time each month.

The sweeping proposal would have the Treasury buy up bad mortgage-related debts from financial institutions, including U.S. subsidiaries of foreign banks, to try to stem the worst financial storm since the Great Depression. This is supposed to leave banks with more money and fewer problems, according to two sources familiar with what was said at the meeting.

The Securities and Exchange Commission (SEC) is considering further limits on short-selling, a practice that allows investors to bet on a decline in a company’s stock price, according to a person familiar with the matter. Critics of the practice say short sellers are driving down the share prices of financial companies, thereby contributing to their destruction. So, short sales could very well be out of the housing market picture in the very near future.

People are withdrawing money from money-market mutual funds. Banks are refusing to lend to one another. Several large financial companies need money to stay in business, including the bank Washington Mutual, which is seeking a buyer. Regulators and the banking industry are increasingly concerned about customer withdrawals from money-market funds. Crane Data, which tracks the industry, said total deposits in money-market funds fell Wednesday by at least $79 billion, or about 2.6 percent.

Money-market funds are particularly important because they buy short-term debt, which is used by financial companies and other corporations to finance day-to-day activities.

“As of now, the Bush administration has only offered a concept with a staggering price tag, not a plan. Even if the U.S. Treasury recovers some or most of its investment over time, this initial outlay of up to $700 billion is sobering,” says Democratic presidential candidate Barack Obama.

If a plan does move forward, Democrats may try to demand concessions from the suddenly humbled industry, said Sen. Charles E. Schumer (D-N.Y.), chairman of the Joint Economic Committee, including support for a proposal to permit bankruptcy judges to modify mortgages for distressed borrowers. Currently, judges may set new terms for mortgages on second homes but not on primary residences.

At this point, all of this financial turmoil seems only to affect conventional loans. Credit is pretty much frozen.  FHA Lenders don’t even want to lend to each other much less borrowers, which is why FHA, VA and other government-backed Ginnie Mae loans are being extended (particularly for refinance loans) at a record pace. What’s happened so far is that interest rates have dropped lower than they’ve been in a year.

With sellers having to deal with a huge inventory of houses on the market and declining prices, they have to make what they have for sale stand out in the marketplace. One of the ways is to be open to FHA home refinancing and other government-backed loans. It may take a little longer to process the loan, but at least loans are being extended through the government-backed channels rather than being stagnated as are conventional loans. It’s better to jump through a couple of extra hoops in getting your house sold than to let it sit while all this financial mess is sorted out by investment bankers that adversely affect lenders and their ability to lend.

If investment banks aren’t making any money, they can’t fund loans. So, until investment bankers can make money to fund lenders, conventional lenders won’t be able to extend loans, so FHA and other government-backed loans are pretty much the only players in the housing market. Sellers need to accept FHA home loans, and borrowers need to apply for them to buy houses. This financial mess has made FHA not only the refinance loan of choice, but also the purchase loan of choice.

FHA lending standards are still reasonable, and FHA only requires 3% down. However, the down payment requirement will be going up to 3.5% in January of next year. But, that’s still a lot better than what conventional loans have to offer. And, at least you can get a FHA loan. Not too many people can get conventional loans right now, and they probably won’t be able to for quite some time to come. If you’re looking to buy while housing prices are low, FHA and other government-backed loans are the best way of securing financing for your new home. Otherwise, you could be in for a long wait, especially if you’re a first-time buyer who can’t afford a 20% down payment.