On November 11, Secretary of the Treasury Henry Paulson announced just such a plan for mortgages owned by federal housing agencies Freddie Mac and Fannie Mae. Unfortunately, these entities own only a small percentage of the outstanding sub-prime mortgages -- the type that give rise to most of the foreclosures. According to Sheila Bair, head of the Federal Deposit Insurance Corporation (the regulator of most of the nation's banks), this policy only addresses the tip of the foreclosure iceberg. The FDIC is pushing its own program that may prove to be the centerpiece of the Obama plan.

According to the Treasury announcement, your Freddie or Fannie mortgage payments will be reduced to 38% of your pre-tax income by lowering your interest rate and extending the term of your mortgage. Oddly, this 38% figure is nearly 10% higher than the standard ratio previously used by lenders to determine affordability. In other words, your modified Fannie or Freddie mortgage will be technically unaffordable by a large margin. Huh!

In tandem with this new Fannie and Freddie mortgage program, the federal government continues to offer (under the HOPE for Homeowners Act) 30-year fixed rate FHA-insured mortgages for homeowners at risk of foreclosure. While you don't have to be behind on your payments to participate in this program, it does require your mortgage owner to voluntarily cash out the current loan at something short of your home's current appraised market value (just how short will likely range between 3% and 10%, due to amendments included in the bailout bill). So far, very few lenders have stepped up to the plate. And homeowners aren't all that thrilled either since they would have to share at least 50% of any future equity they develop with the federal government.

It's important to keep in mind that federal foreclosure mitigation policies are being fashioned by a few individuals who likely will not be around on January 20, 2009. Also, the Democrats' majorities in the House and Senate will be enhanced. As the economy continues to deteriorate and a new government takes hold, radical -- and unpredictable -- changes in the federal government's approach to the foreclosure epidemic are virtually guaranteed.

If you want to know about what modification opportunities are available for your mortgage right now, whether under the federal programs or under other programs operated by private mortgage owners, you'll need to find out who's calling the shots and what type of plan they offer. Consider using a free HUD-certified housing counselor to help you get this information. You can find a counselor in your area by calling 1-888-995-HOPE.

While the federal government mulls its approach to reducing foreclosures, California's governor is moving forward with new legislation designed to encourage lenders to aggressively modify mortgages, according to Carolyn Said, staff business reporter for the San Francisco Chronicle. The new law would apply to owner-occupied homes and would, in effect, mandate an additional 90-day delay to an already lengthy foreclosure process -- unless the lender seeking the foreclosure has an "aggressive modification policy" in place.

Among other things, such a policy apparently would require modifications downward so that the borrower would not have to pay more than 38% of his or her income, and would offer options such as extending the loan period to 40 years and deferring some of the principal balance until the home is sold or refinanced. The basic idea here is that increasing the foreclosure process by 90 days would be so financially detrimental to foreclosing lenders that they would choose the modification route.

Other states are taking similar actions. For example, both New York and Massachusetts have recently enacted laws requiring 90 days advance notice before foreclosure proceedings can be commenced. As with the proposed California legislation, these 90-day advance periods make foreclosure more expensive (because the lenders typically receive no payments during these periods) and may encourage them to also adopt "aggressive" modification polices.

There is no question that the modification landscape is shifting radically under new state laws, but the big changes are yet to come. Under the federal bailout bill, the Treasury Department and government housing agencies must have plans in place by December 2 designed to keep people in their homes. These agencies will undoubtedly be conferring with the Obama transition team on these plans, and the plans that emerge can be expected to have the Obama stamp of approval.

The Act's main components are:

1. The lender must contact the borrower that is in default at least 30 days prior to initiating foreclosure proceedings in order to assess the borrower's financial situation and explore options for the borrower to avoid foreclosure. The lender must also inform the homeowner that he or she has a right to an additional meeting that must be scheduled within 14 days, upon request. These requirements effectively increase the advance notice period for a California foreclosure sale from 110 days to 154 days.
2. The lender must provide the borrower with the telephone number of a HUD certified counselor. The Act Authorizes the HUD certified counselor to represent the borrower in subsequent discussions with lenders regarding options to avoid foreclosure.
3. The lender must maintain a toll-free number providing access to a live representative during business hours.
4. The lender must provide any renters on the property with either a 60-day notice to quit or a new lease.
   
5. An owner of a vacant property acquired through the foreclosure process must maintain the exterior of the property or be subject to a fine (by a local government entity) of up to $1,000 per day.

Probably the most important of these changes from the previous homeowner's perspective is the requirement that the new owner maintain the exterior of vacant properties to avoid blight. This will likely lead either to quicker evictions by the new owner, or an arrangement with the homeowner under which he or she can remain on the property in exchange for maintaining it.

The new notice and contact obligations placed on the lender may also prove important both to homeowners who want to negotiate with lenders and to homeowners who decide to fight the foreclosure in court (since the greater the number of notice-type requirements placed on a foreclosing lender, the greater the chance that mistakes will be made that justify a court derailing the foreclosure itself). For more information on common defenses to foreclosure, check out this article in the Nolopedia.

On October 17, however, in a letter to all mortgage lenders who hold FHA-insured loans (HUD Mortagee Letter 2008-32), the Department of Housing and Urban Development has made it clear that loss-mitigation efforts should move forward despite the fact that the mortgagor is in bankruptcy.

While the HUD letter doesn't constrain holders of non-FHA insured mortgages such as Bank of America/Countrywide, these and other lenders will often follow HUD policies, making it likely that you won't miss out on a mortgage modification opportunity if you decide that filing bankruptcy is in your best interest.

Of course, it would make sense for you to contact your lender to see whether it will be following this new HUD policy or whether your bankruptcy will take you out of the running for a mortgage modification. It also makes sense for you to check with a HUD-certified housing counselor by calling 1-888-995-HOPE.

If your mortgage debt is significantly more than the value of your home -- which is becoming the norm rather than the exception -- the main question is whether the property's value will bounce back enough to give you at least a little equity in your house in the not too-distant future.

If you owe at least 25% more than the value of your house -- whatever you determine it to be -- the wise economic decision, under the present circumstances, would be to extract as much money as you can from the house now by stopping your mortgage payments and staying in the house payment-free for as long as possible, which can be as long as a year in many states.

How do I know what the market will do in the future? I don't. And I always keep in mind the advice that Mark Twain is reputed to have given a young man: "Buy land, they're not making it anymore." Also, no formula exists that can predict how soon a particular real estate bust will be over. But, while the general history of real estate booms and busts might indicate a fairly speedy recovery, history has never seen a combination of such factors as:

• the federal government takeover of the two major government housing loan entities
• the implosion of the finance industry
• a complete collapse of the residential loan market
• continued high numbers of foreclosures 
• the inability to accurately determine residential real estate values
• super-tight credit markets
• the likelihood of a deep recession, and
• tapped-out consumers who can't make good on any of their debts, mortgages included.

The fact is, there is no guarantee your house will ever recover its original value. As the old saw goes, you don't want to throw good money after bad. If the housing market fails to rebound because of these factors (and others sure to come), every economic sacrifice you make now to keep your house could be for naught if you ultimately lose it.

Probably the biggest misconception is that many people are barred from Chapter 7 because their income is too high. The new bankruptcy law did make filing more difficult for people whose incomes exceeded the median income for their state, but only between 5% and 10% of would-be filers face this problem. All the others slide easily under the median income bar.

The new bankruptcy law did make it more difficult to get rid of some types of debts -- private commercial loans, recent credit card charges, and debts incurred in a divorce or separation decree -- but the vast majority of debts that could be discharged under the old law can continue to be discharged under the new law, including credit card and medical debt, deficiencies from foreclosures and repossessions, and bank loans.

Under the new law, filers have to undergo two mandatory counseling sessions -- one before and one after filing -- but these have not proven to be a barrier to filing, at least after an initial confusion due to ignorance of the new law. Also, the new law requires some additional documentation, such as tax returns, wage stubs, or bank records, but once again, virtually all filers can handle these items.

There are many things to consider when deciding whether to file bankruptcy, but you should not be misled into believing that it is no longer feasible. For almost all filers, the new bankruptcy is very much like the old bankruptcy -- an essentially administrative process in which you disclose information, appear for one brief meeting with the trustee, and wait for your discharge papers to arrive in the mail 60 days later.

This raises an interesting question for homeowners who are contemplating filing bankruptcy: What effect will bankruptcy have on a homeowner's ability to participate in a lender's home loan modification program? While only time will tell for sure, here are two important points to consider.

First, when you file a Chapter 7 bankruptcy (the most common kind), the title to your home technically passes to your bankruptcy estate and is "owned" by the bankruptcy trustee -- the official appointed to handle your case. Countrywide is telling its homeowners that it won't consider them eligible for a modification while a Chapter 7 bankruptcy case is pending. So filing bankruptcy might take you out of the action just at the wrong time.

Even more problematic, a Chapter 7 bankruptcy typically cancels the promissory note portion of your mortgage along with your other debt. However, even if you don't owe anything on the mortgage itself, the lender will still have a lien on the property in the amount of the mortgage, and will be entitled to foreclose on that lien. In other words, even though you don't owe anything on the mortgage after bankruptcy, you'll still have to pay on it if you want to keep your house. Confusing? You betcha.

So, what's my point? If you don't owe anything on your house after your mortgage, you won't have a mortgage to modify, and it's unlikely that the new programs will offer modifications for liens remaining after bankruptcy. The only way to avoid this result is to offer to reaffirm the mortgage as part of your bankruptcy case (that is, agree to a new mortgage) and hope the lender agrees. As part of this process you can attempt to negotiate different terms for the new mortgage that would be similar to what you would otherwise get outside of the bankruptcy process.

Bankruptcy used to be a really good remedy for people facing foreclosure. However, in the brave new world of mass mortgage modifications, bankruptcy may foreclose your ability to partake of the manna from heaven pouring forth from our nation's mortgage lenders. For this reason, if you think you might qualify to have your mortgage modified, either by Countrywide or by your lender, strongly consider holding off on your Chapter 7 bankruptcy until you know which way the mortgage modification winds are blowing. For more information on whether you might qualify to have your mortgage modified, find a non-profit HUD-certified housing counselor by calling 1 888 995-HOPE.

For the program to work, lenders must be willing to accept buyouts of their loans that will provide the lender with 90% or less of the current appraised value of the home. For instance, if an appraisal shows that your home is worth $200,000, your lender would have to agree to cash you out at $180,000, regardless of what you owe on the mortgage.

Not only the primary lenders, but also the holders of second or third mortgages, will have to sign off on the deal -- and there's nothing forcing them to do so. In truth, people with second and third mortgages will have trouble qualifying for a new mortgage under this program.

If you eventually hope to make some money off your home, this program is probably not for you. Homeowners who receive refinancing under the HOPE for Homeowners program will be required to share a portion of any future appreciation in home value with the federal government. In other words, if you sell or refinance your home, you may have to send some of the profits to the feds. The amount will range from 100% to 50%, depending on when the property is sold or refinanced. And if there was an additional mortgage holder in the business, he or she may also be entitled to a share of the appreciation.

Not everyone will qualify for refinancing under this program. Basically, you must be at risk of foreclosure under regulations being developed by a new regulatory agency. You will have to document your income, and it must be adequate to make the new loan affordable under standards set out in the National Housing Act. You have to be living in the house you are seeking to refinance and you can't own any other real estate. Finally, you must certify that you haven't intentionally defaulted on your mortgage or any other debt, and that you didn't furnish false information when you obtained the mortgage you seek to refinance.

To find out more about this program and whether you qualify for it, you should seek assistance from a free, HUD-certified nonprofit housing counselor. For a list of these counselors, see HUD's website at www.hud.gov (click on "Avoid Foreclosure", under the "Homes" column) or call 1-800-569-4287. You can also call 1-888-995 HOPE.

Myth #1: Foreclosure should be avoided at all costs.

The truth: In fact, foreclosure can be your friend and a better option than those frequently urged on stressed homeowners, such as short sales and deeds in lieu of. False. See the entry, "How to Walk Away From Your Home With Money in Your Pocket" for more on foreclosure without fear.

Myth #2:You should move as soon as possible once foreclosure proceedings start. Otherwise the sheriff will forcibly throw you out on the street.

The truth: Foreclosure proceedings typically take several months from the time you first receive notice of your default and the time your home is put up for sale at a public auction. Then, the new owner must follow state legal procedures to evict you, which requires at least some notice (anywhere from 3 to 30 days) and a court order.

Myth #3: When facing foreclosure, your best option is to conduct a short sale.

The truth: A short sale occurs when you convince your lender to let you sell the property for less than you owe on it. The problem is that you have to move out upon the close of escrow, and you therefore give up the opportunity to live in the house for many more months, payment free. See the Nolopedia article "Short Sales and Deeds in Lieu of Foreclosure" for more.

Myth #4: If your home is being foreclosed anyway, there is no good reason to file for bankruptcy.

The truth: If your plan is to stay in your home payment-free as long as possible, bankruptcy can delay the foreclosure auction -- and thus your ultimate move-out date -- by a number of months.

Myth #5: Your home won't be sold in foreclosure while you are negotiating with the bank.

The truth: Once foreclosure proceedings have begun, negotiations with your lender must be successful prior to the date set for the foreclosure sale. Lenders often state right up until the date of a scheduled foreclosure sale that the negotiations are on track, and then pull out at the last moment. This isn't necessarily a deliberate tactic. Rather, it may be a sign of disorganization -- the left hand not knowing what the right hand is doing.

There is much to be said about this legislation from various perspectives -- political, economic, and financial -- but here I want to contradict an oft-expressed opinion: that homeowners facing foreclosure are not being helped by the bailout legislation.

The basic idea afloat out there is that absent a provision in the bill that would authorize Chapter 13 bankruptcy judges to modify residential mortgages and interest rates, the homeowners are being left high and dry. Not true. While such a bankruptcy provision would benefit a portion of the population in mortgage trouble, many more folks facing foreclosure either don't have sufficient income to propose a viable Chapter 13 plan, or just can't afford the legal fees.

While Chapter 13 can also be useful in scheduling missed payments over the course of the repayment plan, many -- if not most -- homeowners can afford to both keep their mortgage current and pay an extra amount into a repayment plan every month to pay off the arrears. Further, if missed payments are the only problem, many lenders are now amenable -- outside of bankruptcy -- to extending the loan period and tacking the missed payments on at the end.

Simply put, Chapter 13 is a relatively narrow remedy in the larger foreclosure context. The language in the failed legislation, on the other hand, would provide much broader relief to homeowners facing foreclosure. Here's why.

Under the bailout legislation, in a large number of foreclosure situations, the federal government will be involved in one way or another. That alone will be somewhat of monkey wrench in the foreclosure gears. But that's not all: All the government agency players will have to have a plan under which they will seek to keep homeowners in their home. This plan will provide a legal basis for advocates and housing counselors to push for meaningful modifications and relief from foreclosure.

While the federal agencies (and mortgage servicers, in cases where the mortgages continue to be privately owned) will have to take the impact on taxpayers into account when negotiating a mortgage workout, they will likely be willing to modify the mortgages down to the market value of the property, or even below, since the legislation prefers that mortgage workouts take place within the context of the HOPE for Homeowners Act as amended by section 124 of the Emergency Economic Stabilization Act. Further, the Government will, where appropriate, facilitate conversion of the old loan into a 30 year fixed-rate FHA insured mortgage as provided for in the HOPE for Homeowners Act.

In short, because of increased government involvement with foreclosures under a mandatory plan that encourages retention of home ownership, many more homeowners will be able to keep their homes than previously, and for those who don't qualify for help, the foreclosure machine is likely to be gummed up beyond all imagination. From my standpoint, this is a very good thing.

That got me to thinking: It would be very helpful for TV public affairs shows to always put up sidebars or bubbles showing the net personal worth and annual income of their various talking heads. The same would go for TV appearances by public officials, politicians, and political shills of all stripes. I found myself wondering about the Fed chairman's net worth, and then the members of the Committee and the other "experts" assembled to support the administration's request. From there, my thoughts jumped to the TV commentators and pundits who are either super rich themselves or operate in those circles.

Why should we care about someone's wealth whose views are foisted upon us 24/7? Every time one of these well-heeled folks says something being proposed is in "our" interest, I have to wonder whose interest they are talking about. Surely Secretary Paulson's interest is not the same as mine, as my net worth is slim to none. So, when Henry Paulson, or Ben Bernanke or Nancy Pelosi or Rush Limbaugh, or John McCain advises that a course of action would be in "all our interests," I'm pretty sure they're thinking of a relatively small circle of family, friends, and associates whose net worths are way up there in the many millions. There are exceptions to this class-based viewpoint of course -- Franklin Delano Roosevelt may have been one -- but for me, it holds more truth than not.

So here's what I think about the proposed bailout. It's crystal-clear that the people who have made out big time under the current credit-debt system desperately want it to continue. And for them, the bailout is a necessity. It may be that it's a necessity for the rest of us as well, but I'm unwilling to take it on trust from the people who are pushing that line.

If I had knowledge of who had most benefited from the housing and credit bubbles, I would be better positioned to assess whose interests were being served in the proposed bailout. For now, it appears to me that the "titans of Wall Street" and the government that serves them are using the same shock-and-awe approach to this power grab as has worked so well with the American people in the past -- scare the hell out of them, and then take what you like.

This, of course, implies that this was and is an engineered crisis. And why not? Everyone in a position of responsibility repeats the mantra that these high-flying finance types are very smart people. If so, they must have seen it coming. A lot of us said-to-be less brilliant people saw the handwriting on the wall a long time ago.

Of course, a possible alternative explanation is that the Masters of the Universe (to paraphrase Tom Wolfe's Bonfire of the Vanities) are far too arrogant and completely lacking in common sense. In that case, we really ought to ignore what they say and let events take their course. It's not inconcievable that "the market" will produce a better outcome. I would like to see, however, a broad-based program to help the millions of homeowners facing foreclosure, even if a larger bailout bill never makes it out of Congress.

According to a plethora of financial market pundits, the takeover will "calm financial markets" and hasten the day when real estate values can be determined with some amount of certainty. As long as prices keep falling, sales will not keep up with inventory. Undoubtedly true. However, perhaps the time has come when America really is bankrupt in deed, if not in name, and it will just take a few respected leaders (possibly a presidential candidate or two) to call out the naked emperor. In the meantime, we can expect to be treated to a series of "light at the end of the tunnel" statements by the "powers that be", all designed to calm the savage consumer beast and keep the big money in America instead of some other, more financially stable, country.

Although the real estate fiasco can be hard to understand, a brilliant article in the Sunday, September 14^th San Francisco Chronicle pulls it together about as well as anybody can. The most important point in the article is that the new housing recovery law will likely only benefit the most irresponsible of the impacted homeowners -- this because of the abililty of the lenders to pick and choose which loans they will cash out at 90% of the home's current appraised value. While this approach may help the bottom lines of the various banks that got caught shorthanded, it does little for our sense of fairness. Or, to put it another way, it makes the old saw "let no good deed go unpunished" a little less funny in the case of the millions of homeowners who have struggled to stay current on their mortgages but who will now be deprived of relief because their loans aren't bad enough to justify the lender taking a hit.

How does this work? Foreclosure proceedings typically begin after you have missed between 3 and 5 monthly payments. A few more months are likely to pass before your home comes up for sale at a foreclosure auction. If your home isn't purchased at the auction--which these days is typical--you will be able to remain until your home is put up for sale by a real estate company and you are legally evicted--all of which can take a good many more months.

Depending on your state, it can take a year or more from the time you decide to act until the time you need to once again start paying for shelter. Using this opportunity to save for the future will grease the skids when you need to find new housing, and will make it easier to live without credit, a worthwhile goal in itself.

The credit bubble is leaking furiously, as shown by skyrocketing foreclosure rates, but it hasn't popped yet. People keep borrowing more, and if they can't borrow on their home equity, they just run up the debt on their credit cards. And if people can't afford to pay their mortgage loans, you can bet they won't be able to pay down their credit cards, which generally have far steeper interest rates and penalties.

To borrow from Winston Churchill, it appears that foreclosures were not the beginning of the end of the credit crisis, but merely the end of the beginning.

Trends in earning, spending, and saving have pointed to a credit crisis for years. It may not end until an unprecedented wave of consumer and small business bankruptcies wipe away the debt that just can't be repaid. Personal bankruptcy rates are already rising -- there were 40% more in 2007 than in 2006, according to the American Bankruptcy Institute. There may come a day, not too far away, when millions of consumers will throw up their hands and walk away from their mountain of unsecured debt by declaring bankruptcy.

You can follow the credit bubble as it shifts and morphs its way through our financial institutions at http://www.federalreserve.gov/releases, where the Federal Reserve posts monthly reports that track the effects of the credit crisis on America's financial infrastructure.

If the flow of money is the fuel of American capitalism, then these reports are the fuel gauge. The Fed's unglamorous reports give us hard data on how much money is coursing through the American economy.

• Monthly G.19 Reports. These are the reports on consumer borrowing, both traditional loans (such as car loans) and "revolving debt," also known as credit cards. Each month, the Fed lists the total amount Americans have on our credit card bills. The amounts are staggering -- $968 billion in credit card debt, more than 7% higher than just last year -- and show no signs of shrinking. Read more at http://www.federalreserve.gov/releases/g19/.
• The "charge off" rate. This is the percent of loans, including credit card balances, that the lender has written off as uncollectible. The latest figures show that banks are giving up on 5.47% of the credit card amounts owed to them. This figure is the highest since the current bankruptcy law took effect, with the exception of a brief flurry of bankruptcies before the passage of the law. More information here: http://www.federalreserve.gov/releases/chargeoff/.
• The savings rate. This data shows how much Americans are saving each year. It's been hovering between zero and 2% for five years: http://research.stlouisfed.org/fred2/series/PSAVERT. For other Fed research data on personal spending, see http://www.bea.gov/national/index.htm#personal.
• The bankruptcy filing rate. This data is kept by the US court system, updated monthly and can be found here: http://www.uscourts.gov/bnkrpctystats/statistics.htm.

You can get other important numbers and information from non-governmental sources, including:

• RealtyTrac, which offers one-stop shopping for the latest foreclosure statistics and news: http://www.realtytrac.com/news-trends/index.html
• InsideARM.com, which offers an excellent, well-organized archive of timely articles on economic data affecting the debt and credit industry. The link below is for Credit Card news, but be sure to hover your cursor over the News & Analysis link for a list of other areas you can search: http://www.insidearm.com/go/tags/credit%20card.

What the Times article left out -- strangely, seeing as so many bankruptcy lawyers were quoted -- is that there are two exceptions to the tax bomb. If you are insolvent at the time of the debt forgiveness, you will also be forgiven your tax liability. And, here's the kicker: If you file bankruptcy prior to the debt forgiveness (read: foreclosure) the bankruptcy will not only hold off the foreclosure (at least temporarily), but also discharge the debt, so there's nothing to forgive and no income to tax.

Insolvency can be difficult to prove after the fact, but there is no doubt about the bankruptcy exception. Although many people shy away from bankruptcy, it can be a marvelous remedy when dealing with the possibility of foreclosure. It's beyond my comprehension why that point wasn't made.