Two of the hottest issues in Washington late last week concerned real estate.

Number One: Whether and how to help hundreds of thousands of financially-struggling home owners deal with imminent mortgage-payment "resets" on subprime mortgages.

And Number Two: What to do about owners who are already heading over the waterfall-months behind on their payments and tumbling towards foreclosure.

The Treasury Department's "triage" plan to assist some home owners by freezing their current rates or helping them to refinance into more affordable mortgages is getting most of the media attention.

But it would be limited to the "walking wounded" -- people who've been able to handle their current level of monthly payments, but who can't afford the payments their loan is scheduled to adjust to next year.

The mortgage servicers for such people would be encouraged under the Treasury's plan to extend their current interest rate for up to five years, or steer them to replacement loans, such as an FHA mortgage or a state or local housing agency program with low, tax-exempt bond rates.

But what about homeowners in much worse shape -- people who are now heading for near-certain foreclosures on subprime mortgages they never could afford?

Lenders and Wall Street bond investors argue that nothing can, or should, be done for these folks.

After all, they signed up for loans they should have avoided. In some cases, the loans were based on fake incomes, fake assets, and hyped-up appraisals.

Let borrowers abide by the terms of their loan contracts, they say, and hand back their houses to the lenders who made the loans in the first place.

Sounds reasonable.

But community group activists were all over Capitol Hill last week making a very different case: What about property values in the hundreds of neighborhoods where many of these borrowers bought their houses?

Everyone knows that multiple foreclosures depress all their neighbors' property values, and with prices already on the decline in many markets, who needs more grief?

That's an argument that's beginning to get some traction on Capitol Hill, where bills are now pending in both the House and Senate to forestall foreclosures in certain bankruptcy situations.

The bills would essentially treat houses like other personal assets and limit lenders' financial claims to the current market value of the house itself, rather than the full unpaid balance on the loan.

The legislation is opposed by most banking groups. But a top housing expert, Mark Zandi, chief economist of Moody's Economy.com, told the Senate Judiciary Committee last week that that single change in the law could help nearly 600,000 homeowners stay in their properties next year, rather than losing them to foreclosure.

We'll keep you posted on both of these issues in upcoming reports.

Published: December 10, 2007

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.