The average rate on a 30-year fixed rate loan, excluding points, dropped to 3.87 percent, the lowest rate on record in Freddie Mac’s 40-plus year mortgage survey. Last week, the average rate had jumped to 3.98 percent up from the previous week and former low of 3.88 percent. Rates have averaged under 4 percent now for about three months, marking an historic period of exceptionally low interest rates. Last year at this time, for example, 30-year fixed rate mortgages carried a rate of 4.81 percent, almost a whole percent higher.

The 15-year fixed rate mortgage also found a new low, with the average rate falling to 3.14 percent from 3.24 percent the week before. Last year, the rate was 4.08 percent.

“Most mortgage rates eased to all-time record lows this week as fourth quarter growth in the economy fell short of market projections,” said Freddie Mac vice president and chief economist in a statement. “The Gross Domestic Product rose 2.8 percent in the final three months of 2011, below the market consensus forecast of 3.0 percent, while consumer spending in December was flat.”

He hinted that there may still be signs of a reviving housing market though.

“One bright spot, however, was that fixed residential investment increased for the third consecutive quarter and residential construction spending rebounded in December, rising 0.7 percent.”

Mortgage interest rates are expected to remain near historic lows throughout the year, influenced heavily by the Federal Reserve’s decision to keep its target rate near zero and its commitment to buy mortgage-backed bonds to keep rates from rising.

The question remains whether consumers will be able to take advantage of these rates, with tightened lending standards in place and with the continued uncertainty of the job market.

There were 221,536 distressed properties purchased during last year’s third quarter, an 11 percent decrease from the previous quarters.

The numbers are down simply due to the fact that there are fewer foreclosed properties on the market these days. After many banks were exposed to be mishandling foreclosure documents and were forced to review their processes, it has taken much longer to get these distressed homes out of the pipeline and ready for sale.

“The number of REOs (bank-owned properties) coming onto the market has been artificially limited because of processing issues,” said Daren Blomquist, a spokesman for RealtyTrac, as quoted in a CNN Money article. “That has reduced supplies.”

True recovery of the housing market is not likely until all the foreclosures in the “shadow inventory” are processed.

“The sooner the market gets more clarity about accepted foreclosure procedures, primarily through the long-promised settlement between multiple states attorneys general and major lenders, the sooner the market can more efficiently dispose of these distressed properties,” RealtyTrac Chief Executive Officer, Brandon Moore, said in a statement.

Foreclosures sold on average for $165,322, or 34 percent less than non-distressed sales, which is down from 37 percent last year. The disparity was much smaller in the hardest hit housing markets around the country though. In Nevada, where distressed properties made up 57 percent of all home sales, they sold for only 20 percent less than traditional home sales.

Sales of foreclosures are not likely to stay so low indefinitely. Blomquist predicts that home repossessions will probably rise 25 percent in 2012, making way for even lower home prices and a possible bottoming-out of the market before the end of the year.

Under the Home Affordable Modification Program, or HAMP, banks have received incentives to lower principal on loans for borrowers who owe more than their homes are worth. Currently, about 20 percent of all American homeowners fit into that category.

Fannie Mae and Freddie Mac, now under government conservatorship, hold many of those mortgages however, and have been uninterested in reducing loan balances. As recently as last Friday, Fannie and Freddie’s regulator, the Federal Housing Finance Agency sent a letter to Congress pointing out that such actions would be too costly to taxpayers. (The two mortgage giants have already sapped $169 billion in taxpayer bailout funds since being saved from ruin in 2008.)

Still, the Obama Administration is hoping that by offering monetary incentives to Fannie and Freddie, they will be more inclined to help struggling homeowners reduce their loan amounts.

“While government can’t fix the problem on its own, responsible homeowners shouldn’t have to sit and wait for the housing market to hit bottom to get some relief,” said the President in his State of the Union Speech.

And in the announcement Friday Treasury Assistant Secretary Timothy Massad spelled out the details.

“To encourage the GSEs to offer this assistance to its underwater borrowers, Treasury has notified the GSE’s regulator, FHFA, that it will pay principal reduction incentives to Fannie Mae or Freddie Mac if they allow servicers to forgive principal in conjunction with a HAMP modification,” he said.

Of course, Fannie and Freddie do not have to participate and the decision will still be up to FHFA head Edward DeMarco, who to this point has been very conservative on allowing the companies to take on any added risks.

More than 20 percent of all U.S. homes have negative equity at this point, according to mortgage data company CoreLogic, for a combined equity deficit of $750 billion. Borrowers in this situation often choose to default, even when they could keep up with the payments. Beyond foreclosure problems, this widespread issue keeps borrowers stuck in their current homes, unable to sell for the price of the mortgage which limits housing market growth and employment opportunities.

One of the boldest suggestions from lawmakers and some consumer advocate groups is to have Fannie and Freddie, who own or guarantee about half of the nation’s home loans, write-down the principal on underwater mortgages. This would hopefully prevent many more possible foreclosures, as well as help Americans move to where the jobs are.

Yet, it is a controversial and costly plan, with critics are saying would encourage more reckless financial behavior

Edward DeMarco, acting director of the Federal Housing Finance Agency, wrote to the Oversight and Government Reform Committee and informed the members that allowing the 3 million underwater borrowers on Fannie and Freddie’s books to have their principal reduced would require an excess of $100 billion from taxpayers.

The two companies were taken over by the government in 2008 as both were on the verge of collapse and have already used about $169 billion in taxpayers dollars to stay afloat. The FHFA has been very vigilant about allowing either Fannie or Freddie to take on more financial risks.

“FHFA has a statutory responsibility as conservator to preserve and conserve the assets and property of the regulated entities,” DeMarco wrote in the letter, as quoted in a Reuters article.

“Given that any money spent on this endeavor would ultimately come from taxpayers and given that our analysis does not indicate a preservation of assets for Fannie Mae and Freddie Mac substantial enough to offset costs, an expenditure of this nature at this time would, in my judgment, require congressional action,” he added.

The FHFA instead suggested that a program of forbearance, where borrowers would be allowed to reduce or suspend payments for a certain time, asserting this may also be a way to keep people in their homes.

Total sales grew 5.0 percent to a seasonally adjusted annual pace of 4.61 million homes last month, from November’s downwardly revised 4.39 million rate. Compared with December 2010, sales were up 3.6 percent. Sales as a whole in 2011 rose 1.7 percent to 4.26 million from 4.19 million in 2010.

NAR chief economist Lawrence Yun viewed the latest figures with a very optimistic eye.

“The pattern of home sales in recent months demonstrates a market in recovery,” he said in a press release. “Record low mortgage interest rates, job growth and bargain home prices are giving more consumers the confidence they need to enter the market.”

Sales were up in every part of the country, led by a 10.7 percent jump in the Northeast. Sales grew 8.3 percent in the Midwest, 2.9 percent in the South and 2.6 percent in the West.

Total housing inventory also fell in December, another positive omen, with a 9.2 percent decrease to 2.38 million existing homes on the market. At the current sales pace, that represents a 6.2-month supply, back into a healthy range.

“The inventory supply suggests many markets will see prices stabilize or grow moderately in the near future,” Yun said.

Yet home prices continued to fall last month with the median existing home price falling to $164,500, a 2.5 percent decline over the previous 12 months.

Other less positive news in the report included a 33 percent contract failure rate for December, indicating that tightened credit standards continue to pose problems for would-be buyers.

Still, the NAR sees good things ahead for 2012.

“The American dream of home-ownership is alive and well. We have a large pent-up demand, and household formation is likely to return to normal as the job market steadily improves,” said NAR President Moe Veissi. “More buyers coming into the market mean additional benefits for the overall economy. When people buy homes, they stimulate a lot of related goods and services.”