Last month, the Senate passed a bill that pretends to be mortgage relief. In truth, it's mostly a tax-cut bill, with goodies for home builders (to bail them out of losses), a $7,000 tax credit for people who buy foreclosed homes (which gives them an unfair advantage over neighbors not in foreclosure who are also trying to sell) and an extra deduction for homeowners who use the standard deduction (they probably have paid-up mortgages, meaning they're not in trouble). It must be an election year.

The House has a more targeted package. It's hoping to encourage lenders to take a loss on loans in distress by reducing them to an amount that borrowers can afford. The carrot, says Rep. Barney Frank, is an FHA guarantee that the remaining mortgage would be paid in full. The government would share in the home's future appreciation (if any!).

Sheila Bair, chair of the Federal Deposit Insurance Corp., thinks that none of these plans can handle loans rapidly and in bulk. She'd use federal money to pay off 20 percent of a distressed loan if the lender will lower the amount the borrower owes. The Feds would be repaid when the house was sold. But again, lenders aren't yet losing enough to agree.

The public in general opposes help for homeowners in trouble: it's their own fault, let 'em rot. The risk is that we'll all rot together, says economist Mark Zandi of Economy.com. Unless substantially more loans are saved, the recession will hurt more than we expect.

Reporter Associate: Temma Ehrenfeld

© 2008