Bailouts, bailouts and more bailouts: That's pretty much all they're talking about up on Capitol Hill right now, but some of the bailouts have direct and potentially important impacts on home owners and real estate.

At a congressional hearing last week, House Democratic leaders put the Treasury Department on notice that if it wants to draw down the second half of the $700 billion mega-bailout package, it will have to commit to a massive program of mortgage modifications to keep thousands of homeowners out of foreclosure.

California congresswoman Maxine Waters put it this way to Treasury bailout chief Neel Kaskari: "Don't come here and ask for another penny," she said, "because if you do I am going to work 24 hours a day" to block you.

On the same day, Waters introduced legislation that would require the Treasury to adopt a plan advocated by FDIC chairwoman Sheila Bair to systematically lower payments and soften terms on tens of thousands of delinquent mortgages.

Congressional Democrats are angered by the Treasury's main use for the first $350 billion of the bailout funds approved by Congress in October: Most of it's been handed to banks, rather than using portions of the money to assist individual borrowers facing financial troubles.

Now the Treasury is talking about creating a new bailout program for home buyers and the building and real estate industries by cutting mortgage rates to four and a half percent.

The program could cost the Treasury billions in subsidies to pay for the rate "buydowns" -- money that presumably would come from the second $350 billion left in the $700 billion fund.

So reportedly the Treasury is now working on some form of large scale loan modification plan -- in part to gain access to some of the $350 billion.

But here's a complication that surfaced last week: A new federal study found that more than half -- 53 percent-of delinquent home owners who receive modifications on their loans RE-DEFAULT within six months. At that point, they're back where they started - heading for foreclosure.

Since Bair's plan would provide federal guarantees to lenders to lower their losses in the event of re-defaults after six months, Treasury officials believe it could cost many billions of dollars and still not prevent foreclosures.

Bair and her supporters argue to the contrary: If you modify a loan effectively, they say, not just lowering the interest rate but cutting the debt balance, you achieve more successful results and permanently keep owners out of foreclosure.

That's the crux of the current bailout debate.

Published: December 15, 2008

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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.