Foreclosures to rise, whomever wins White House

Even the optimism that surrounds a new president taking office cannot resurrect home values overnight, and presidents have no direct ability to reduce rising mortgage rates. Nevertheless, Democrat Barack Obama and Republican John McCain both promise help for homeowners facing foreclosure.

Obama supports a broader role for government than does McCain. Both envision the Federal Housing Administration providing new, cheaper mortgages to distressed homeowners who otherwise would have difficulty refinancing into more secure government-insured loans with lower monthly payments.

For the plans to work, lenders would have to be willing to take a substantial loss by reducing the amount owed on the loan. But some would have a powerful incentive to do so. A refinancing deal could allow them to recover far more money than they would get from the costly process of foreclosing on the property and trying to resell it.

Obama supports legislation along these lines by Sen. Chris Dodd, D-Conn., that would help about 400,000 homeowners. People would not have to have good credit to qualify as long as they could show they can afford the new payments.

"If the government can bail out investment banks on Wall Street, we can extend a hand to folks who are struggling on Main Street," Obama said.

McCain's plan would provide relief to 200,000 to 400,000 homeowners. The aid would be available only to people who could show they were creditworthy when they got their original loan. The plan offers "every deserving American family or homeowner the opportunity to trade a burdensome mortgage for a manageable loan that reflects the market value of their home," he said.

The FHA piece of the Dodd plan would cost close to $1 billion. The money would come from diverting dollars in the early years from an affordable housing fund financed by the profits of the mortgage companies Fannie Mae and Freddie Mac. McCain's FHA provision is estimated to cost from $3 billion to $10 billion and would mean either cutting federal spending elsewhere or having the government borrow more. The first choice is to trim spending, a McCain aide said.

Experts predict foreclosures will continue to climb well into 2009. Some believe there is a chance for improvement in late 2009, but more think that will not happen until 2010.

A long-term solution is tied to a turnaround in house prices. Slumping home values are blamed for the bulk of the increasing foreclosures. Troubled borrowers are left owing more to the bank than their homes are worth, so they walk away from their homes. Dumping more empty houses on the market adds to the pile of unsold homes, and that drives home prices down further.