A stronger-than-expected uptick in housing starts confirms that the housing market has bottomed out after its steepest slide since the Great Depression. But it’s going to have to do better than that if the economy is to have a sustainable recovery.

Data reported Wednesday show the market is clearly moving in the right direction: Housing starts posted solid gains in January. And with prices down considerably since the market bubble burst in 2006, the "affordability" of homes has improved substantially.

But housing production, at under 600,000 units a year, is still far below the recent peak of more than 2 million at the height of the bubble just four years ago. Meanwhile, millions of homeowners face foreclosure, adding to the enormous supply of unsold homes on the market at distressed prices.

Other recent economic data also point to an economy bouncing along the bottom. A report Wednesday showed that industrial production, as measured by the Federal Reserve, continued to expand in January.
But as of December, the index had only recovered to levels last seen in 2002. That means industrial production now stands where it was eight years ago.

Digging out of that deep economic hole will take years, according to a forecast by Fed policymakers released Wednesday. The central bankers predicted it will take "some time" for the economy and the jobs market to get back to normal. In a previous report, Fed officials suggested it could take five or six years for economic conditions to return to full health. A "sizable minority," however, thinks it could take more than five or six years for a return to normal.

So far government and the lending industry efforts to stabilize head off foreclosures and the housing market have focused on trying to make existing mortgages more affordable by lowering payments and stretching out the payoff date. But the plan just isn’t working.

On Wednesday, the Treasury released the latest monthly figures for its Making Home Affordable program. As of last month, of the millions of homeowners who were supposed to get help, only 116,000 had gotten permanent relief. As more homeowners lose their jobs,  fewer qualify for a loan modification at any level. And so far few lenders have budged on cutting the amount of principal owed.

“The approach right now is we're kicking the can down the road,” said Daniel Mudd, former CEO of mortgage giant Fannie Mae, which was taken over by the government in 2008.

“We’re modifying, we're hoping the modifications work," he told CNBC. "But at some point we're going to have to face the music. And the music is that principal is going to have to be reduced. The mortgagers will have to be on a stable footing. Then we can start to move forward.”

It’s not clear whether foreclosures have yet peaked; some forecasters expect them to increase again this year. Some lenders fear that when a series of foreclosure “moratoriums” expire in the next few months, a backlog of foreclosures may hit the market at once, sending prices lower again, and putting more homeowners under water.

Housing analysts also point to a backlog of so-called “pay option” adjustable-rate mortgages that are due to reset later this year and next to higher payments.  Those resets will add further pressure to financially stressed homeowners trying to keep up.

At least some of the credit for the recent housing recovery goes to government initiatives to support the market, including a homebuyer tax credit and a Federal Reserve program to hold down mortgage rates lower though the purchase $1.25 trillion worth of mortgage-backed bonds.

After home sales perked up last fall as people went shopping in time to beat the first deadline for the tax, Congress extended it through this spring. But the credit may have just moved sales up that would have happened anyway.

“As we get past the expiration of the tax credit and start to look into the summer, things can change quite a bit if some of these government programs are pulled back,” said Paul Puryear, a housing analyst at Raymond James.

The housing industry also is bracing for a possible rise in interest rates after the Fed wraps up its final purchase of mortgage bonds in March. Megan Talbott McGrath at Barclays Capital estimates that every percentage point rise in mortgage rates cuts housing demand by about 8 percent. Once the Fed stops buying, she expects mortgage rates to rise by 1 to 1.2 percentage points by the end of the year

“We don't think it stops growth, but it could keep a little bit of a lid on it,” she said.

Some banks are trying to dampen another wave of foreclosures by moving more aggressively with so-called “short” sales, in which the home buyer sells the home for less than the mortgage amount and the lender forgives the unpaid principal.

“It’s a good idea, given that (lenders) get a higher price overall for housing,” said McGrath. “We think that's a positive and it will help to clear inventory a little bit quicker.”

With one in four homeowners saddled with a bigger mortgage than their home is worth, according to a recent report, short sales may head off even bigger problems for lenders. After years of slogging through a mortgage modification process clogged by multiple logjams, some homeowners are simply walking away from their mortgages. That’s creating even bigger headaches for lenders.

“It's not a pretty picture: Roofs don’t get maintained, appliances get taken out,” said Mudd. “That's the worst thing for everybody. But the short sale puts new buyers on a new footing — in at a value they can afford. That solves the problem.”

Those lower values may help new home buyers, but they continue to hammer the budgets of state and local governments as falling home prices cut deeply into property tax revenues.  Until the housing market recovers, state and local budgets will remain under pressure.

A full-fledged housing recovery will take more than a resolution of millions of underwater mortgages and the unsold inventory of foreclosed homes. Though the housing industry seems to have found a bottom, it has a long way to go before returning to “normal” levels.

No one is expecting a return those boom year levels anytime soon. But without a substantial rebound in home building, the rest of the economy will likely remain stuck in neutral.

Millions of Americans who are struggling to save their homes from foreclosure are trapped in a labyrinth of disappointment and misinformation created by the very institutions they’ve been told are trying to help them.

Ten months into the government’s third program in two years to stop a record wave of foreclosures, homeowners, housing counselors, consumer advocates and attorneys working with borrowers report that the latest effort is falling far short of its goal. In many cases, lenders are moving to foreclose even after homeowners get approved for loan modification, housing counselors and attorneys say.

The problem, they say, goes beyond the paperwork snafus and staffing shortages at lenders and mortgage servicers that have created massive bottlenecks for the millions at risk of losing their homes. Those have plagued the government’s foreclosure relief efforts since the first government-industry joint program, the Hope Now Alliance, was launched in October 2007.

Homeowners face numerous hurdles trying to get their mortgage modified. In some cases, applications are rejected with little or no explanation. It’s impossible to independently verify if a homeowner qualifies because the Treasury has not disclosed the eligibility formula used by lenders — a complex set of calculations that housing counselors and consumer attorneys have dubbed “the black box.” Housing attorneys report that some lenders are ignoring the program’s guidelines altogether and moving to foreclose without properly reviewing mortgages for possible modification.

“It’s been a stubborn challenge," said a Treasury official, who agreed to an interview but requested anonymity. "But this is something that’s never been done before."

Guidelines ignored
Many of the urgent problems with the government’s $75 billion Home Affordable Modification Program, or HAMP, are systemic. They can be traced to its basic guidelines for lenders and mortgage servicers — the companies tasked with collecting payments from homeowners and forwarding them to the investors holding a homeowner’s mortgage.

Launched last March as part of the Making Home Affordable initiative, HAMP was the Obama administration’s flagship program to halt a wave of foreclosures that two previous government efforts — the Hope Now Alliance and Hope for Homeowners — had failed to slow. In return for signing on to the program, lenders and mortgage servicers who agree to follow standard loan modification guidelines are paid a taxpayer-funded bounty of up to $4,000 for each loan they modify. Homeowners begin with a “trial” modification that is supposed to be made permanent if they keep up with payments for six months.

The HAMP guidelines call on lenders to try to modify every mortgage before moving to foreclosure. But that’s not what’s happening, according to a survey of more than 100 housing attorneys by the National Association of Consumer Advocates.

“Ninety-five percent (of the attorneys surveyed) said that a (mortgage) servicer had attempted to proceed with a foreclosure sale without a proper HAMP review,” said Ellen Taverna, a NACA associate who conducted the survey. Nearly half the housing attorneys said they have represented 10 or more households who had faced a foreclosure without a proper loan review; 14 percent said they have represented 50 or more households in that situation.

So far, the HAMP program hasn’t slowed a record pace of foreclosures. Some 2.8 million households were threatened with foreclosure last year, according to RealtyTrac, a Web site that tracks foreclosure filing nationwide. The company estimates the figure could rise to 3.5 million this year as payments reset on a wave of "pay option" adjustable-rate mortgages, which came with an especially nasty feature called "negative amortization." Simply put, these homeowners face the prospect of a rising mortgage balance - leaving them owing more than they originally borrowed.

Frustrated by the lack of progress with loan modifications, some homeowners are giving up and choosing “strategic default” — simply walking away from their homes. Those defaults, and the ongoing wave of foreclosures, will continue to weigh on the housing market, holding back the nascent economic recovery.

Saving a home from foreclosure can be as simple as rewriting a costly, high-rate subprime loan to prevailing mortgage market rates. If that doesn’t bring the payment to within roughly 31 percent of a homeowners’ monthly income, HAMP guidelines require mortgage servicers to follow a step-by-step process to cut mortgage payments further. First, they can write down the interest rate to as low as 2 percent and then stretch the term of the loan to 40 years. If that doesn’t work, lenders can cut the amount of principal owed.

But cutting principal is entirely voluntary, and most lenders aren’t doing so, housing counselors and attorneys say.

“I don’t think it’s common at all,” said Helene Reynaud, vice president of national grants for the National Foundation for Credit Counseling. “When we ask our counselors, they never seem to see them. Or very, very rarely.”

'More confused than ever'
Even if a homeowner gets a “trial” modification - and makes each new payment on time - they can still lose their home.

“The foreclosure and loan modification proceed on two separate tracks,” said Diane Thompson, an attorney with the National Consumer Law Center, who recently wrote a report on financial incentives that often encourage mortgage services to foreclose. “If you allow the foreclosure process to continue you’re going to end up with (foreclosure) sales because there’s not good communication between those two divisions in servicers.”

That’s what happened to Courtney Scott, a retired nurse living in an Atlanta suburb, who has spent the last two years trying to get Bank of America to modify her loan.

A week before Christmas, she got a letter saying that her mortgage was going to foreclosure, even though the bank hadn’t reviewed her application for a loan modification. Desperate to save her home, along with her substantial down payment and the equity she’s accumulated by making repairs, Scott says, she spent several hours on the phone trying to get through to bank representatives. When she finally reached them they were unable to find her application.

They told her that she would have resubmit it, which she did.

So she was thrilled when the good news arrived via e-mail Jan. 4.

“Your loan modification has been approved,” the e-mail said, asserting that a full package of documents was in the mail and that a “workout negotiator” would soon be in touch by phone.

“This will be a great end to what has been an unnecessarily drawn-out story,” she told msnbc.com.

But Scott’s joy was short-lived.

On Jan. 12, she got a call from a bank representative who told her that she didn't qualify for a new loan after all. A follow-up email confirmed the bad news.

“I am more confused than ever,” said Scott.

(A Bank of America spokeswoman declined to comment, citing privacy laws, but said she would look into Scott's case.) 

The communications breakdown is more likely when foreclosures are handled by outside attorneys hired by a loan servicer, say housing counselors. If the lender or servicer doesn’t take the extra steps required to stop the clock on a foreclosure proceeding, it can easily overtake the process of modifying a loan, they say.

“The (foreclosure) process carries on a momentum of its own,” said Thompson. “Some of it happens more or less automatically once you start scheduling things. Once a sale is scheduled, someone has to actively intervene to stop the sale, and the current guidance from Treasury allows a (foreclosure) sale to be scheduled even if someone is making current payments on their trial modification.”

The Treasury official said that guideline is under review.

"We certainly hear the issue, and want to make sure the (HAMP) guideline on foreclosure prevents anyone’s home from going to sale," the Treasury official said. "We are looking at guidance to make sure the communication is clear."

The 'Black Box'
Homeowners who have been turned down for a modified mortgage report that servicers often don't spell out why they deny an application, say housing advocates. With no formal appeals process, HAMP makes it extremely difficult for homeowners and their counselors to figure out whether their applications were properly reviewed.

Attempts to contact lenders and servicers often go unheeded, according to Brenda Lopez, chief operating officer at SurePath Financial Solutions, a HUD-approved credit counseling service in Camarillo, Calif.

“They say, ‘I don’t have access to that information,’ and then they transfer you, and then they’ll transfer you again,” she said. “Then they’ll tell you, 'The case is already closed, you cannot reach the negotiator and I don’t have that expertise to tell you why it got denied. It got denied.' And that’s it.”

Late last year, the government "issued instructions for servicers to specify in detail" why a borrower was rejected for the program and to consider other loan mitigation options, the Treasury official said.

Worse, say housing counselors and attorneys, there is no way to independently verify whether a lender or servicer has followed the government’s HAMP guidelines. That’s because the Treasury hasn't disclosed the "black box" formula used to decide which loans will get modified.

Under HAMP guidelines, lenders can deny a loan modification if the “net present value” of the new loan is less than the return they would get from not offering a new loan and going through with foreclosure instead.  In other words, the official guidelines allow mortgage servicers to base their decision entirely on whether the outcome is in the best interest of the lender or investor, not the homeowner.

Because the Treasury has kept the formula a secret, homeowners who have been rejected for modification can't check the lender’s math to correct possible mistakes about the borrower's income, home value, credit score or other critical pieces of data.

“As long as there is secrecy around the formula, and it’s not well understood how it functions, that’s a big issue,” said Reynaud.

In response to requests from housing counselors and attorneys, the Treasury plans to provide more information on the formula by the end of the first quarter, the Treasury official told msnbc.com.

That secret formula also has slowed loan modification negotiations with homeowners because many lenders are apparently unwilling to deviate from the formula, even if the investor holding the mortgage is willing to be more flexible, according to housing counselors.

“Many of the investors are anxious to do a workout that goes beyond the standardized approach that the servicers have scripted,” said David Berenbaum, chief program officer at the National Community Reinvestment Coalition, which oversees a national network of housing counselors. “The servicers blow a gasket when (our counselors) call the investors (directly.) They get very upset with us. But ultimately there's nothing they can do.”

That kind of end run is exactly what happened last week in Scott’s case. While she continues to try to appeal her loan modification rejection with her bank, she said she was surprised by a call from someone representing the investor holding her loan, who said they were offering another chance to modify her mortgage with a slightly lower payment. (Scott is working with a local HUD office to follow up on the offer.)

The number of homeowners who have been helped by the program has been dismally small.

When first announced last year, Treasury officials said they hoped to stop as many as 4 million foreclosures. But HAMP guidelines initially were incomplete, and mortgage servicers complained they weren’t given enough guidance on how they should be applied.

For their part, lenders and loan servicers express their own frustrations with the HAMP program. They note that some homeowners don’t respond to their outreach efforts, fail to properly fill out applications and often submit incomplete paperwork.

They also complain that the HAMP program has been plagued with numerous revisions and delays in issuing technical details attached to broad guidelines. Since April 2009, new program requirements were released nine times, and more than 90 clarifications were issued for new or revised forms, reporting changes and policies, according to the Mortgage Bankers Association. The changes meant mortgage servicers had to alter their procedures and retrain employees, which added to delays.

In July, as the pace of foreclosures continued to rise, major lenders were summoned to a Washington meeting with Treasury officials. There, they committed to modify 500,000 mortgages by Nov. 1.

By the end of December just 66,000 homeowners had been issued permanent loan modifications, with temporary modifications in place for about 850,000 more (who still faced the prospect of having it reversed by the lender.)

The Treasury official said the major focus now is on converting those temporary modifications to permanent loans.

Some banks and lenders have done better than others, according to a recent report by ProPublica, an independent, non-profit newsroom that produces investigative journalism.

“The big names are among the worst-performing servicers,” according to ProPublica. “Bank of America, JPMorgan Chase, CitiMortgage and Wells Fargo together account for more than 60 percent of the 3.4 million mortgages eligible for the program. All four have converted a small percentage of the trials begun three or more months ago into permanent modifications. The highest is Wells Fargo, with only 13 percent."

Some housing counselors think the Treasury needs to get tougher with lenders and loan servicers who don’t follow the guidelines that call for a thorough loan review before moving to foreclosure.

“I don’t think that Treasury has reached the point where they can even enforce their own directives, either because they don’t have the resources or the tools to punish the servicers,“ said Reynaud.

Others say the lack of enforcement is the result of problems with the program itself, starting with the contracts lenders and servicers signed with the Treasury to participate in HAMP.

“In most circumstances, all (Treasury) can do is ban servicers from the program,” said Thompson. “And that’s not a very effective way of getting them to make modifications if they’re not already making them.”

Treasury officials say they expect to make some relatively minor changes this week to HAMP guidelines. But a growing number of stakeholders think broader changes are needed.

Lenders note that, since foreclosures began surging more than two years ago, the primary cause has shifted from rate adjustments to job loss, which leaves homeowners unable to manage even a lower monthly payment.

The MBA wants to see the HAMP program modified to include standard guidelines for loan forbearance, in which lenders temporarily suspend payments until the borrower can find a new job. It also wants to HAMP guidelines expanded to include interest-only loans, which the trade groups says could help more people get an affordable loan.

Others suggest it’s time to revisit a proposal, fiercely opposed by the lending industry, to allow bankruptcy judges to modify mortgages from the bench. (Primary mortgages are currently the only form of debt excluded from so called “judicial modification.”) Housing advocates say changing the bankruptcy law would dramatically speed the pace of loan modifications and save millions of homes from foreclosure.

“There are many people in the industry who would be glad to see HAMP go or who don’t believe that these modifications can work,” said Thompson. “Most people who are representing consumers think that there are there are significant flaws in the program’s design, but that some kind of government-sponsored modification program is essential to get us out of the foreclosure crisis.”

With home prices continuing to drift lower nationwide, something like one in five homeowners now owes more on their mortgage than their house is worth. It’s tempting to consider just walking away and starting over. Here are a few reasons why that’s a bad idea.

As in past housing busts, the ongoing surge in foreclosures has revived stories about a practice called “jingle mail” — in which people just mail their keys to the bank and move away. It’s hard to know just how widespread the practice really is. But it’s not a good idea, for several reasons.

The most important reason: You signed a contract, took the money and promised to pay the lender back. That’s what the law now requires you to do. If you can’t, the law provides for a number of other ways to discharge your debt properly.

There’s a lot of blame to go around for the current housing and lending meltdown: Borrowers bought more house than they could afford, mortgage brokers tricked borrowers into signing ruinous loans, lenders paid no attention to whether borrowers were good for the money, appraisers went along with ridiculous home values, Wall Street packaged bad loans for sale to investors, rating agencies failed miserably to warn those investors about the risk, regulators slept through the entire mess, etc.

None of that, however, has anything to do with your obligation to pay a debt you agreed to take on — unless you can prove you were a victim of fraud or predatory lending. If we all got to decide which bills we wanted to pay, we wouldn’t have a functioning economy for very long.

Here’s another good reason: You may not have to throw in the towel on your mortgage after all. The government has just created a $75 billion program to help people in your situation. There’s no way to know whether you’ll qualify for help unless you call your lender. Some lenders are prepared to forgive some — or all — of the principal that exceeds the value of your house. Others may lower your monthly payment and push that extra principal into a “balloon” payment — a lump sum you’ll owe when you sell your house or pay off the rest of the mortgage. If you stay long enough for the housing market to recover, you may find you’re no longer underwater on your loan.

If you don’t qualify for a loan modification, you can try to arrange what’s called a “short sale” — where the lender agrees to let you sell your house at current market value — and then lets you off the hook for the remaining, unpaid mortgage balance. If you can’t find a buyer, the lender may accept what’s called a “deed in lieu” of foreclosure; basically, you sign over the house and the lender calls it even.

You may not find any of these options very attractive; the process of contacting your lender and negotiating a resolution won’t be easy. The lending industry has been far too slow in coming up with practical, effective solutions for the mess it was partly responsible for making. None of that, however, lets you off the hook for properly terminating the agreement you made with the lender. Millions of homeowners are in the same (leaky) boat.

If none of these alternatives work, the law still provides for people who — for whatever reason — can’t pay their debts. It’s called bankruptcy. It’s probably the last option to consider; it will ruin your credit rating, and it’s not a pleasant process to go through. But there’s no shame in finding yourself unable to pay your bills.

Which is more than can be said about just walking away from them.

There’s no magic to consolidating debts and really no reason you should pay someone else to do it for you. If you do, the odds are you’ll pay more than you need to.

There are several reasons for consolidating debts, including the convenience of making one payment. But the main reason is to try to lower the rate you’re paying on higher-rate debts, like unsecured credit cards, by using lower-rate credit, like a home equity loan secured by your house.

The only way you’ll know if you can get a lower-rate, consolidation loan is to shop around among various lenders in your area. Stick with local banks you know or established national lenders; there are plenty of “consolidation” lenders trolling the Internet for suckers — uh, customers. Avoid those pitches you get in the mail or on the phone or Web sites that promise to “make your debts disappear.” These folks typically charge a big upfront fee; in some cases, that may be the last you’ll hear from them. In other cases, they’ll try to get you to sign over your home.

And steer clear of storefront “payday” lenders who charge outrageous rates. You’re looking for a lender who will offer a fixed-rate, secured loan or line of credit.

You’ll get a lower rate on a secured loan because the bank bears a lower risk that you won’t pay it back. If you don’t, the bank can take back whatever you’ve used as collateral to secure the loan.

The downside to borrowing against your house, of course, is that it’s far too easy. As many people now losing their homes have discovered, there are huge risks — never mentioned by the banks that carpet bomb your mailbox with teaser rate offers — to using your home as an ATM machine.

If, after shopping around on your own, you find you still need help, find a HUD-certified credit counselor in your area to help walk you through the process. One of the easiest ways to find these agencies is to look them up on the National Foundation for Credit Counseling Web site. You may be asked to pay a small fee.

Last week’s long-awaited foreclosure relief effort from the Obama administration touched a nerve among homeowners who didn’t get in over their heads in the borrowing frenzy. Or who are also struggling to make their payments but don’t want or expect government help.

Why, they ask, should my taxes be used to help pay my neighbor’s mortgage?

It turns out there is a pretty good answer.

How will the homeowner bailout affect responsible borrowers such as myself? I purchased my condo two years ago, borrowed what I knew I could afford considering my budget, and am not at risk of foreclosure. It seems unfortunate that we are bailing out those who did not borrow responsibly or did not truly understand their mortgages before signing them. So on top of me not seeing any advantage from the housing bailout, my taxes will most likely increase as well.
— Lars M., Evanston, Ill.

You’re not alone in wondering why your taxes should be used to help your neighbor make their mortgage payment.

The Obama administration’s plan to use $75 billion of tax dollars help some homeowners pay their mortgages touched off a huge backlash. Apart from a flood of mail to the Answer Desk inbox, the outrage was galvanized by CNBC’s Rick Santelli, who covers the commodity markets in Chicago. On Thursday, Santelli gave voice to that outrage in an on-air rant that — among other things — called for a “tea party” this summer to protest the administration’s plan to “subsidize losers’ mortgages.”

It was apparently a rant heard ’round the world — or at least ’round YouTube. On Friday, White House press secretary Robert Gibbs felt the need to respond directly to Santelli’s attack on the Obama's foreclosure relief plan by noting that many homeowners facing foreclosure won’t be eligible for help, including investors and people who “long ago knew they were in a house they couldn’t afford. Instead, he said, the plan is targeted toward helping people “who aren’t yet in trouble keep from getting in trouble.”

Gibbs also pointed out that millions more Americans will benefit from the government’s comprehensive effort to drive down mortgages rates, allowing homeowners who aren’t in trouble refinance to a better rate and save money.

Preventing foreclosures also pays benefits to anyone who owns a home by slowing — and possibly stopping — the ongoing slide in home prices. Each new foreclosed property — sold at fire sale prices — drives down the value of every other home on the street.

“If you live in a home that’s near one that’s been foreclosed, your home value likely has dropped by about 9 percent, which for the average home is about $20,000,” Gibbs told reporters Friday. 

According to the U.S. census, there were about 75 million owner-occupied homes at the end of 2008. By our math, that means that the $75 billion being spent to prevent foreclosures works out to about $1,000 per owner-occupied home. Which means you’re spending $1,000 in taxes to head of the loss of $20,000 on the value of your house. These days, that doesn’t seem like such a bad investment.

Gibbs invited Santelli to the White House to go over the plan and explain why it helps all homeowners.

“I’d be happy to buy him a cup of coffee,” said Gibbs. “Decaf.”

If my home is already in the foreclosure process, can the homeowner bailout help? Or is it too late?
— Alicia O.

It’s not necessarily too late if you meet the criteria and your lender is willing to modify your loan. Many lenders have agreed to stop foreclosures already in progress until they have a chance to review them to see if the home can be saved with the help of the new plan.

Unfortunately, not everyone is going to be eligible for help. If you can’t show that you have enough income to cover even a modified loan, the plan can’t help.

The main provision of the plan is a series of financial incentives (payments) to lenders who agree to cut your monthly payment. The two most common ways to do this are to lower your interest rate to the current market rate or to stretch out your payments for 40 years. (You’ll still pay as much, you just get longer to do so.)

So if you live in the home backed by the mortgage you want to change, and if your current interest rate is much higher than the market rate (about 5.25 percent at this writing), you may be a good candidate for a new, more affordable loan. Even if you’re already in foreclosure.

The goal is to come up with a monthly payment that amounts to no more than 31 percent of your monthly income. If, after cutting your rate and stretching out your payments, you still don’t have enough income to meet that 31 percent threshold, the plan probably won’t work for you.

Aside from the burden of unaffordable monthly payments, many homeowners are carrying a mortgage that’s bigger than their home is worth. In some cases, lenders may be willing to reduce the principal down to the level of your home’s current value. After all, if they foreclose, they’re going to lose that money anyway.

But that’s up the lender or the company “servicing” your mortgage for the investors who own it. The program is entirely voluntary.

For more on who is eligible for help, check out our Frequently Asked Questions.

Could you tell us if the Sixteenth Amendment was ever ratified by the States?
— Thomas M., East Sandwich, Mass.

We seem to get this one a lot every year as the deadline for income tax filing approaches.

The Sixteenth Amendment gives Congress “the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
  
The amendment was proposed by the 61st Congress on July 12, 1909, when it passed the House, having already passed the Senate on July 5. Ratification was completed Feb. 3, 1913, when the legislature of the 36th state approved the amendment. (Since there were 48 states, 36 were required to ratify the amendment. (Delaware, Wyoming, and New Mexico each passed it Feb. 3, hoping to cast the winning vote.)

On Feb. 25, 1913, Secretary of State Philander Knox certified that this it had become part of the Constitution. Here’s when each state ratified it.

Now get back to filing your taxes.

Alabama, Aug. 10, 1909
Kentucky, Feb. 8, 1910
South Carolina, Feb. 19, 1910
Illinois, March 1, 1910
Mississippi, March 7, 1910
Oklahoma, March 10, 1910
Maryland, April 8,1910
Georgia, Aug. 3, 1910
Texas, Aug. 16, 1910
Ohio, Jan. 19,1911
Idaho, Jan. 20, 1911
Oregon, Jan. 23, 1911
Washington,Jan. 26, 1911
Montana, Jan. 27, 1911
Indiana, Jan. 30, 1911
California, Jan. 31, 1911
Nevada, Jan. 31, 1911
South Dakota, Feb. 1, 1911
Nebraska, Feb. 9, 1911
North Carolina, Feb. 11, 1911
Colorado, Feb. 15, 1911
North Dakota, Feb. 17, 1911
Michigan, Feb. 23, 1911
Iowa, Feb. 24, 1911
Kansas, March 2, 1911
Missouri, March 16, 1911
Maine, March 31, 1911
Tennessee, April 7, 1911
Arkansas, April 22, 1911
Wisconsin, May 16, 1911
New York, July 12, 1911
Arizona, April 3, 1912
Minnesota, June 11, 1912
Louisiana, June 28, 1912
West Virginia, Jan. 31, 1913
Delaware, Feb. 3, 1913
Wyoming, Feb. 3, 1913
New Mexico, Feb. 3, 1913
New Jersey, Feb. 4, 1913
Vermont, Feb. 19, 1913
Massachusetts, March 4, 1913
New Hampshire, March 7, 1913

The amendment was rejected (and not subsequently ratified) by Connecticut, Rhode Island and Utah.

The Obama administration's sweeping plan to stop foreclosures is expected to help millions of Americans save their homes from the sheriff’s auction. But as the broad outlines of the plan sift through the lending system, it’s already clear that millions more won’t be helped.

With as many as 10 million households expected to face foreclosure in the next four years – more if the job market continues to deteriorate – the scope of the problem is just too big for the measures announced so far.

That means that not all of those who are eligible for help will get it.

Despite the government’s pledge to standardize the process, the decision to modify a loan to make it more affordable still rests with individual lenders, loan servicers and investors. That means that two homeowners in comparable situations dealing with different servicers may get two different outcomes.

“There's $75 billion targeted for this program, and there is a much bigger hole than $75 billion,” said David Resler of Nomura Securities International. ”So who do you pick?”

The $75 billion plan is intended to slow foreclosures by offering a package of financial incentives to prod lenders and mortgage servicers to modify more loans. Another $200 billion will be spent to provide more capital to mortgage giants Fannie Mae and Freddie, and raise by $50 billion the limit on how many loans those agencies can acquire.

Banks and mortgage servicers are already gearing up for the expected flood of calls from millions of desperate homeowners. Until the details of the plan are finalized March 4, it’s too soon to know exactly who – and how many – will benefit from the plan.

But officials in charge of the plan acknowledge it isn't big enough to help everyone facing the prospect of foreclosure. The plan's funding, in fact, represents only about 8 percent of the expected $1 trillion in residential mortgage losses, according to projections by Goldman Sachs. (That figure doesn’t include losses on mortgages owned or sold by government mortgage giants Fannie Mae and Freddie Mac.)

While the program is widely seen as an improvement on the lending industry’s voluntary efforts to date, it’s far from clear how many of the 9 million homeowners the plan is targeting will get help. Much depends on how private lenders, loan servicers and investors who hold mortgages respond. To date, the logjam in modifying loans has centered on the loan servicers hired to collect payments from homeowners and dole them out to investors.

Servicers who modify loans say they risk getting sued by investors, who may claim the changes in terms cost them money. The Obama final plan did not include earlier proposals to offer servicers legal protection from those lawsuits.

Critical plan details – including the government’s standard guidelines for modifying a loan – have yet to be worked out. Those guidelines are intended to speed the glacial pace of negotiations created by legal complications that ensued when hundreds of loans were bundled together in a pool and sold to thousands of investors.

“Right now we're caught between the borrower and the investors,” said Jeannine Bruin, a spokeswoman for ResCap, a GMAC unit that servicers roughly 2.8 million home mortgages. “We’re just waiting for further specifics on those guidelines.”

In the meantime, banks and loan servicers like ResCap, which is already making 5 million outbound calls a month to homeowners, are bracing for a heavy volume of incoming calls sparked by the announcement of the foreclosure relief effort.

“Fortunately, even before the plan came out we had started hiring and increased our lending and servicing staff by 40 percent,” said Bruin. “Now we need to anticipate what kind of calls are going to come in. How do we route the calls? What’s the most efficient way to handle the volume? What kind of materials will callers have received? Should we be more proactive in terms of contacting them?”

Officials in charge of the program acknowledge that, while the plan is expected to help millions, an unknown number of those callers won’t get helped. And it may take months for them to learn the final decision.

“We're going to see that as we go through this process, that some of these houses are empty, and they're going to be foreclosed on," said James Lockhart, director of the Federal Financing Housing Agency, which oversees Fannie Mae and Freddie Mac. “But to the extent we can save a homeowner, we can help save their neighborhood and their community.”

The administration is hoping to help two major groups of homeowners who are at risk of losing their homes. The first are those whose income isn’t big enough to keep up with their monthly payment. Some were tricked into signing loans that ‘reset’ to unaffordable payments; some were approved for a loan that consumed more than half their monthly income; some lied about their income on the loan application; and others have lost their job since taking on the loan.

Some of these borrowers will be helped by government payments to lenders aimed at reducing the borrower's monthly payment to 38 percent of their income through various means, including stretching out the term of the loan to 40 years or reducing the interest rate. The government will then further reduce the monthly payment to 31 percent of a borrower’s monthly income.

But many homeowners won’t qualify. For starters, they’ll have to show that 31 percent of their income will cover a monthly payment for the full principal amount at 5.1 percent interest. Those who were too overextended to begin with, or who have lost their jobs, won’t be able to sustain the lower payment and won’t be eligible.

The plan also only applies to owner-occupied homes. Those who may have rented out their house because they can't afford the mortgage will be considered "investors," none of whom will be eligible.

Mortgage modifications made under the plan expire in five years. The hope is that the housing market and borrower incomes will have recovered by then. If not, the payment reverts to the higher, unaffordable level.

“Having these modifications unwind after five years might spur the problem down the road, having it reappear just as the housing market and economy are beginning to recover,” said John Taylor president of the National Community Reinvestment Coalition.

A second, and growing, group of borrowers now owe more on their mortgage than their house is worth. Roughly one in five homeowners with mortgages are in this category.

Many have tried refinancing to a lower rate, but lenders currently won’t loan more than 80 percent of a home’s value. The Obama plan would raise that limit to 105 percent of the current market value on loans held or sold by Fannie Mae and Freddie Mac.

That will help homeowners who are “mildly” underwater, but not those who owe 105 percent or more of their home’s value. The offer is being extended only to loans held or sold to investors by Freddie Mac and Fannie Mae. The majority of the most troubled loans were funded and sold to investors by Wall Street banks and other large lenders, who aren't required to adopt the new maximum loan-to-value ratio.

For homeowners who are more deeply underwater, the holder of the mortgage would have to agree to cut the principal amount back to 105 percent of the home’s value. About three-quarters of homeowners underwater owe more than 10 percent over what their house is worth, according to Goldman Sachs. 

So far, lenders have reacted coolly to cutting principal; there’s little in the plan to warm them up to the idea.

“I would expect that term extension, rate reduction will continue to be the primary tools used to lower the monthly payment, just because it has the biggest bang for the buck,” Michael Heid, co-president of Wells Fargo Home Mortgage, told CNBC.

Homeowners who do convince their lender to forgive part of their principal face another hurdle in a falling real estate market, according to Resler.

“It might get them from under water to above water for now,” he said “but how much of a percentage decline from here would it be to put them back into the current situation?“

President Obama’s plan to trim the rising pile of home foreclosures contains a comprehensive list of new ideas and old ones — an acknowledgment that there is no single solution to the housing crisis at the heart of the recession.

The plan applies $75 billion from the taxpayer-funded financial rescue package to help lenders lower borrowers' monthly payments and reach the administration's goal of keeping up to 9 million families in their homes.

The government also will commit $200 billion to buy up more stock in Fannie Mae and Freddie Mac to shore up the mortgage giant’s financial base, much the way the government injected money in the banking system in return for stock.

Another $50 billion would be allocated to increase the number of loans Fannie and Freddie can buy outright.

“We have been using a squirt gun to try to put out a forest fire in the mortgage market for the last two years. This looks like a howitzer,” said Howard Glaser, a former HUD official in the Clinton administration. “They're throwing everything at it. It's not an incremental approach. It's the first thing on the table I think that has any chance of showing a path to the bottom of the housing market.”

Now it just needs to work.

A lot depends on how quickly and widely the plan is embraced by lenders and the “servicers” who manage mortgage payments for the thousands of investors who hold an interest in the millions of loans that were pooled, chopped into securities and sold to banks and investment funds around the world.

“It may be very aggressive but it's going to take a long time for this to be implemented; it's not going to change things overnight," said David John, a senior research fellow at the Heritage Foundation. “It will probably slow foreclosures, but it will not be enough to by itself stabilize housing prices. And it's certainly not enough to fix the economy.”

Obama offered up the details of the plan in a speech in Phoenix, one of the nation’s most extreme examples of the real estate boom and bust that has lead the global economy into a deep recession. Beyond the specifics, the wide ranging plan is designed to provide an important psychological boost to the battered real estate industry.

“The overall biggest problem I see is just the confidence level of these buyers,” said Robert Hassett, a Scottsdale, Ariz., real estate agent. “The buyers are out there. They just seem to be searching for that bottom to come.”

The Obama administration is hoping that a multi-pronged, multibillion-dollar effort will help lay the groundwork for that bottom.

"In the end, all of us are paying a price for this home mortgage crisis,” Obama said in his speech. “And all of us will pay an even steeper price if we allow this crisis to deepen — a crisis which is unraveling homeownership, the middle class, and the American Dream itself.”

For the past year, the government has largely stayed out of the foreclosure mess, preferring to let bankers and borrowers work out solutions on their own. More aggressive proposals quickly faced strong political opposition on Capitol Hill and on Main Street to using taxes paid by one homeowner to help another at risk of default. Opponents also argued that “moral hazard” requires that lenders and borrowers who made bad decisions should suffer the consequences.

But that approach hasn’t worked. Of the hundreds of thousands of homeowners who have worked out new mortgage terms with lenders, as many as half find themselves “re-defaulting” on their new loans.

Some 1.5 million homes have been lost to foreclosure since the recession began 11 months ago, and another three millions are expected this year. Without aggressive measures, another 8 to 10 million foreeclosures are expected and could go higher if the job market continues to deteriorate.

The glut of foreclosed homes continues to push property values lower and leaves the housing industry mired in its worst recession since the 1930s. On Wednesday, the government reported that new home starts and applications for future projects plunged to record lows in January as all parts of the country showed big declines in building activity.

To stop the downward spiral of housing starts and home prices, the administration is focused on trying to help so-called “preventable” foreclosures. Those are homeowners at risk of falling behind in the their payments but could avoid foreclosure with a lower monthly payment. Many of those borrowers are paying substantially higher-than-market rates on loans that came with onerous interest “resets” that make them unaffordable.

To increase the number of loan modifications and improve the affordability of new loans, Obama is proposing a collection of “carrots” and “sticks” to get lenders and servicers to move more aggressively.

The carrots to lenders are even more generous than earlier proposals. Lenders and servicers would get thousands of dollars in bonuses for successfully modifying loans. The government would also share the cost of cutting monthly payments.

The “stick” in the plan is a proposal contained in several unsuccessful bills considered by Congress over the past year: to allow bankruptcy courts to modify terms of a mortgage — the only form of debt currently off-limits to judges. The hope is that more lenders will opt for the financial incentives of modifying a loan rather than take their chances with potentially more onerous terms ordered by bankruptcy judges. The Obama administration is proposing a "partial cramdown" in which only the principal in excess of current market value would be considered unsecured debt eligible for modification by judges.

Even if the plan works as designed, millions of homeowners will not be eligible. The plan doesn’t apply to investors. That's a potentially thorny issue for buyers at the height of the boom who claimed the home was owner-occupied, or who have since rented their home to make payments they could no longer afford.

The plan also won’t offer help to a homeowner who has lost his or her job and is unable to afford a new, lower monthly payment. Under the plan, lenders would take the loss on mortgage payments lowered to 38 percent of a borrower's income; the government would pay to subsidize a further reduction to 31 percent of income. But those with no income would not be eligible.

One of the thorniest problems many homeowners at risk of losing their home face is the inability to refinance to a lower rate because they owe more than their home is worth. Some one in five households is currently “under water” because of the slump in home prices.

Under current lending guidelines, homeowners can only refinance 80 percent of their home’s value — which for many won’t cover their existing mortgage. The government’s plan would raise that limit to 105 percent of the current market value.

For homeowners with loans worth more than 105 percent of the home's value — which some foreclosure specialists say is one of the biggest roadblocks to loan modification — lenders and servicers could still opt to write down principal, but the decision would be voluntary.

A new $10 billion insurance fund would help protect lenders against losses if home prices fell further after they refinanced 100 percent of current market value.

“The estimated cost to taxpayers would be roughly zero,” said Obama. “While Fannie and Freddie would receive less money in payments, this would be balanced out by a reduction in defaults and foreclosures.”

But taxpayers will be on the hook for the $75 billion spent to buy down monthly mortgage payments for those who qualify. Many homeowners, some of whom also are struggling to make payments, are furious at the prospect of seeing their taxes used to help pay their neighbor's mortgage. To help answer those criticisms, Obama said that all homeowners will benefit from the government’s effort to keep mortgage rates low.

“Millions of other households could benefit from historically low interest rates if they refinance, though many don't know that this opportunity is available to them — an opportunity that could save families hundreds of dollars each month,” he said.

The plan also includes some technical provisions to help untangle the legal morass created by the multitrillion-dollar wave of mortgage securitization at the height of the lending boom. Mortgage servicers have argued that even if they want to modify loans, they fear lawsuits from investors who would have to take less money. Getting those investors to agree on modified terms has been difficult.

To help break that logjam, the Obama plan spells out uniform guidelines for modifying a loan and then protects lenders and servicers from lawsuits. The guidelines include a standard formula for estimating the value of a home in a falling market. Now, each lender and servicer uses its own formula, which offers another opportunity for investors to challenge proposed loan modifications.

While the plan would require lenders accepting government “rescue” funds to use the guidelines, there are no requirements that they modify loans.

After a year of debate, Congress appears close to passing a bill intended to stem the rising tide of home foreclosures and stabilize the shaky housing market.

But even if the bill wins final passage — far from a certainty — the most optimistic forecasts suggest it would help only about 400,000 of the estimated 3 million homeowners who will likely lose their homes in the next year.

Prospects for the bill have been complicated by the mortgage meltdown's latest chapter — the severe turmoil surrounding Fannie Mae and Freddie Mac, the government-sponsored companies that provide much of the capital to the mortgage market. A Bush administration plan to help prop up the two faltering enterprises has been tacked on to the housing bill, generating some backlash from congressional Republicans.

Federal Reserve Chairman Ben Bernanke warned this week that the ongoing housing crisis is having a serious ripple effect.

“The declines in home prices have contributed to the rising tide of foreclosures,” Bernanke told a congressional panel. “By adding to the stock of vacant homes for sale, these foreclosures have in turn intensified the downward pressure on home prices in some areas.”

One major hurdle to passage of the bill is a proposed $4 billion in community development grants to help agencies in hard hit areas to buy and refurbish foreclosed homes, renting them out or reselling them.

The debate over the provision has become something of a showdown. President Bush has threatened to veto the bill if it includes the community grants, while House supporters have vowed to keep it in the final bill, which is expected to come to a vote early next week.

Opponents say using tax dollars to buy foreclosed homes amounts to a bailout for lenders; proponents argue that the funds would create new jobs and help stem the slide in home price where foreclosure rates are highest.

“The real losers in this awful crisis are the residents who live next to the foreclosed property who have continued to pay their mortgages on time yet see their property values rapidly decreasing,” Ali Solis, vice president of public policy for Enterprise Community Partners, a non-profit group that helps finance affordable housing.

The centerpiece of the proposed foreclosure relief effort is $300 billion in federal loan guarantees to help homeowners refinance into mortgages with better terms. But attorneys, housing counselors and others working with strapped homeowners say the proposal falls short because it leaves the decision to modify a loan up to the lender or loan servicing company.

That means the housing bill will have “little or no impact on the number of foreclosures,” according to O. Max Gardner III, a Shelby, N.C. bankruptcy attorney who works with homeowners who are trying to modify their mortgages.

“I just don’t think the bill addresses the core problem,” he said. “You have so many servicers representing so many different interests with each (mortgage pool) to some extent having different guidelines on loan modifications.”

Despite government efforts to prod lenders to speed up the process of reworking bad loans, progress has been slow.

A survey by Moody's Investors Service released Monday found that as of March loan servicers had modified less than 10 percent of the subprime loans with interest rate resets — up from 3.5 percent in December. Some homeowners report that their modified loan came with higher monthly payments, offering little long-term relief.

The survey found that about 40 percent of the loans modified in the first half of 2007 were 90 or more days delinquent as of the end of March.

A weakening economy, along with rising prices for food, energy and other household expenses, has expanded the pool of homeowners at risk of default. Some who might otherwise be able to keep up with their payments are falling behind as job loss or major health expense depletes their savings or retirement funds.

“The crisis is not getting better, the crisis is getting more severe,” said Susan Keating, the president of the National Foundation for Credit Counseling, which works with local agencies helping cash-strapped families. “And the tentacles of the problems are much more far-reaching than any of us would have considered 18 months ago.”

While the initial rounds of mortgage defaults and foreclosures were concentrated on the lower end of the economic ladder, the problem is now hitting families with higher incomes. Gardner says he’s seeing a big increase in bankruptcy filings from wealthier clients.

“From predominantly hourly employees all the way up to doctors, lawyers, insurance agents, people that were involved in the banking mortgage and real estate business,” he said. “It’s just been a massive upward movement on the income scale.”

For some homeowners, no amount of government help will head off a foreclosure. That includes many in states with the highest concentrations of mortgage defaults, such as California, Florida, Arizona and Nevada. In those states up to 40 percent of buyers in recent years were buying the homes as investments, according to Wachovia economist Mark Vitner.

“These investors never thought they’d have to make any mortgage payments. They thought they’d flip it,” he said. “These investors have no money. They have nothing. They used credit cards to make the down payment.”

Other homeowners facing default simply bought more house than they could afford, sometimes based on the advice of a real estate agent or mortgage broker.

With so many different factors behind the rise in foreclosures, the extended debate over the housing bill has brought wide disagreement about appropriate solutions.

Opponents of government relief maintain that borrowers willingly took on debts they knew — or should have known — they couldn’t afford. But as state and federal investigators have brought thousands of cases of mortgage fraud in the past year, the role of mortgage brokers and lenders has gotten more attention.

Bernanke, in announcing new mortgage rules this week, said many borrowers had been victimized by "unfair or deceptive acts and practices by lenders."

Among other provisions, the new Fed regulations require mortgage brokers and lenders to verify that a borrower can afford the mortgage and fully understands the terms. The rules also bar lenders from locking home buyers into bad loans by applying unaffordable pre-payment penalties.

While much of the early debate on the housing bill centered on whether the government should “bail out” borrowers and lenders who got in trouble, the debate has shifted with the collapse of Bear Stearns in March and the problems faced by Fannie Mae and Freddie Mac

Critics of the two companies have long voiced concerns that, with a combined $5 trillion in mortgages and mortgage-backed bonds, Fannie Mae and Freddie Mac had grown too fast and hold too little capital to weather a severe downturn.

The White House's proposed reforms could help maintain a ready supply of affordable mortgage financing for future home buyers. But they won’t help those with existing loans who face default. Or their neighbors who are seeing their home’s value decline.

“It’s not going to speed up or lessen the impact of the correction of the housing market,” said Vitner. “It’s too late for that. There's nothing that can be done.”

Homeowners who are having trouble with their mortgages seem to get the same advice wherever they turn: at the first sign of trouble, call your lenders and see if you can work out a payment plan. But that means figuring out who owns your mortgage — which is not as easy as it looks.

I have been trying unsuccessfully to find out who owns my mortgage but the servicing company just gives me a run around. Don't I have a right to know who owns my mortgage? I need to work out a loan modification but can't find out who to call and the servicing company isn't helping.
— J. W., Chesapeake City, Md.

Of the many nightmares facing homeowners caught up in the mortgage mess, this one is perhaps the most frustrating. From individual lenders to the government-sponsored Hope Now Alliance devoted to untangling this mess, the advice to borrowers is the same: as soon as you think you’re headed for trouble, contact the lenders to see about working out an alternate payment plan.

It’s good advice. The sooner you act, the better your chances of not falling so far behind the situation becomes irreversible. For their part, lenders don’t want you to lose your home either. The last thing they need is another piece of real estate to add to the long list of unsold properties on their books.

But contacting the lender means figuring out who owns your loan. In the turmoil that followed the collapse of the housing boom, some lenders went out of business or were bought up by bigger lenders — and the loans from those defunct lenders changed hands.

As the mortgage market has dried up, lenders have had to lay off workers who, just a few years ago, had a hard time keeping up with the flood of new mortgages. Now, with foreclosures rising, there are fewer employees on the other end of the phone to help homeowners in trouble. Experienced real estate attorneys and professional housing counselors report that they’re also not having much luck navigating the maze of voicemail.

Worse, there may be no single “owner” of your loan if the original mortgage was bundled with hundreds of others and placed in a trust which was then sold off in pieces to hundreds of investors. The servicer — the company hired to make sure the monthly payments got to the right investors — never expected to have so many loans go bad. So they weren't really set up to re-negotiate payment terms with thousands of borrowers.

Still, many of those servicers do have the legal authority to work with you on a payment plan you can handle. It’s their job to maximize investors’ returns, and having you default isn’t going to help anyone. If you can get through to the servicer’s “loss mitigation” department, you might be able to get the conversation going.

A better option might be to get some help from a HUD-approved housing counselor or a lawyer who specializes in working with lenders and may be able to help you cut through the significant thicket of red tape. Check out Web site of the National Foundation for Credit Counseling to locate an office near where you live. If you can’t afford a lawyer, look for a non-profit Legal Services office; many of them are spending a lot more time these days on housing and mortgage issues.

And be sure to check out this story by my msnbc.com colleague Laura Coffey on how to sidestep landmines that can lead to foreclosure.

Can I invest in the stock market without the aid of a stockbroker?
— Steve S., New Mexico

Yes, you can. You’ll still need to open a brokerage account, but you can decide which stocks you want to buy and sell. (Technically, you can buy and sell stocks with anyone you want, but you'll get a better price trading in the market the rest of the world of investors use. And some companies will let you buy their stock directly from them, but you'll have to open an account with each company.)

You can also invest in the stock market without trying to figure out which stocks to buy. There are several ways to do this: the most common is to buy a mutual fund. These investments pool money from many investors — often smaller investors who may have just a few hundred dollars to play with. The investment manager running the fund then uses the money to buy a longer list of stocks than you could with just a few hundred dollars.

Investing in lots of stocks at once is a hugely important hurdle for people who are just getting started. It’s the simple, age-old problem of not putting all your eggs in one basket. Not all stocks go up and down at the same time; it’s been proven that if you hold a bunch of stocks that don’t march to the same drummer, you can increase you overall return with less risk than if you try to just pick a few winners.

Mutual funds still carry the risk that the investment manager won’t pick the right stocks either. For every fund that beats the market average, there’s another one that fell short by the same amount. (By definition, only half of the funds can offer returns that are “above average.”) If you subtract the fees that mutual funds charge to pay the investment manager and other expenses, the average return of all funds is going to be less than the overall return of the market you’re investing in.

That’s why some investors like to just buy an “index” fund – which just buys all of the stocks in, say, the Standard and Poor’s 500 index. In effect, you’re buying the entire stock market – and getting maximum diversification — one investment dollar at a time. You’ll pay a much smaller fee, because the fund doesn’t have to spend the money on research and investment advisors — it just duplicates the index you’re investing in.

There are now so man index funds out there you can diversify your investment in another important way. Just as individual stocks march to different drummer, so do different types of stocks. Most index fund investors like to spread their chips around the table — buying indexes that track small stocks, big stocks, foreign stocks, etc. One of the earliest proponents of index funds was John Bogle, the founder of The Vanguard Group of mutual funds. Today you can buy them through dozens fund companies and online brokerages.

POUGHKEEPSIE, N.Y. - In 2005, when Denise Bolds was looking to refinance her four-bedroom Victorian home in the Hudson Valley town of Poughkeepsie, she was intrigued by a mailing that said she'd been "pre-selected" for a loan program that could lower her monthly payments.

A single mom, Bolds lives with her 66-year-old mother and 17-year-old son, a high school senior who is headed for college. The program supposedly offered a "fixed-rate" loan with attractive terms, she said, which would help make ends meet on her salary as a social worker.

But when she got to the closing, she said, the terms had changed. The “fixed” rate of 5-3/8 percent only lasted two years, after which it could jump to nearly 12 percent, sending her monthly payments from $1,437 to more than $2,000. When she protested, she said, she was told she’d lose money she’d already put down in the application process.

After signing for the loan, she took the matter to the state banking department, which dismissed her complaint, based on the mortgage broker’s explanation that "all information was disclosed fairly and completely to the homeowner," she said.

By last summer, with college tuition bills looming and health complications that required surgery, the jump in monthly payments just wasn’t sustainable. She contacted her lender, she said, but was unable to work out more affordable terms. To avoid foreclosure, Bolds made the difficult decision to sell the house. That got her out from under the mortgage but wiped out her home equity.

“I had to make a decision: It was either (my son’s) education or the house,” she said. “I had almost seven years of equity (in my house), but I have 17 years of equity with my son. So my choice was no choice really.”

More and more homeowners face the same painful decision as the fallout from the housing and lending bust shows no signs of slowing. Foreclosures hit a record high in the first quarter, as did mortgage delinquencies, a sign that more foreclosures are coming.

Poughkeepsie is the county seat for Dutchess County, where one in every 442 households was at some point in the foreclosure process in April, according to RealtyTrac.com, which maintains a national a data base of foreclosure filings. That was the highest foreclosure rate in the state.

Congress continues to debate measures to help slow the pace of foreclosures, including extending hundreds of billions in refinancing from government-sponsored mortgage agencies to homeowners at risk of foreclosure as their loan payments jump to unsustainable levels. Meanwhile, state and local governments in places like Poughkeepsie are doing what they can to find solutions — like offering small loans to help tide homeowners over and offering counseling to mortgage borrowers in a financal bind. But their options are limited.

So far, Poughkeepsie’s economy has held up relatively well in the current economic slowdown. But unemployment began rising last year and has continued rising this year.

For some, it’s a sobering reminder of the devastating job losses in the early 1990s after IBM, the region’s dominant employer, slashed thousands of positions and left the region’s economy reeling.

Since then, as the county has worked to rebuild its economic base, Poughkeepsie has been rebuilding neighborhoods that were hit hard by the last housing recession.

“We have a beautiful Queen Annes' row right around the corner from us here in City Hall on Garden Street, which they completely revitalized,” said Poughkeepsie Mayor John Tyziak. “We have a lot of first-time home buyers who now live there and have strengthened that neighborhood.”

Now, with foreclosures rising, the momentum behind that revitalization effort is in jeopardy. Because Dutchess County didn’t experience the rapid housing development of high-growth areas like Florida and California, the downturn here hasn't been as swift or severe. But as the rising foreclosure rate has spread beyond the hardest-hit areas, communities like Poughkeepsie are beginning to feel the impact.

Homeowners facing foreclosure have several options. Much of the federal government’s response to date has been to encourage homeowners to contact their lender to try to work out more affordable terms. In Poughkeepsie, Hudson River Housing runs a homeownership program to help people facing default or foreclosure restructure their finances and try to work out a solution with their lender. Most people who contact the agency are first-time homeowners, according to executive director Gail Webster.

“They know they got somewhat extended, and they’re hoping to be able to fix it,” she said. “But if they can’t, they came from a rental unit, [so] they're going to go back to a rental unit."

In other cases, Webster said, “they do have the money, but they’re having trouble putting it all together. So you can help them by putting them in touch with a bank that can help them — instead of some kind of mortgage company that got them into trouble in the first place.”

Those who try to work directly with their lenders are finding the process slow going — partly because the rise in foreclosure filings is happening as the lending industry copes with job cutbacks that followed the housing bust.

“(Lenders) are still overwhelmed,” said Mel Spivak, a Poughkeepsie bankruptcy attorney who works with homeowners trying to head off foreclosure. “You don’t know who to deal with. Occasionally you get lucky, but there is really no contact person. There’s really no go-to person. Often when you call these lenders, it’s just a maze of voicemail.”

Some homeowners trying to stop the foreclosure process turn to the federal bankruptcy court here on Main Street, where few lenders even show up — preferring to turn cases over to local lawyers who run through stacks of filings as each case comes before the court. By that point, lenders are usually in no mood to work out a deal, according to Kathleen Silverii, who runs Legal Services of Hudson Valley, a Poughkeepsie agency that helps homeowners who can’t afford an attorney.

“Once (lenders) file the complaint, they don’t want to talk about how to work it out,” she said. “The machinery goes into motion, and it’s about litigating it. It’s no longer about ‘Let's see if you can catch up with your payments.'”

As house prices here continue to fall, some Poughkeepsie homeowners are finding they owe more than their home is worth. For some, the solution is a “short sale” — in which the lender agrees to accept less than the full value of the loan and not foreclose.

Norm MacKay, a local real estate agent for the past two decades, says short sales are making up a bigger part of his business. But while the process helps homeowners avoid the burden of damaged credit brought by a foreclosure, it doesn’t take the sting out of losing their home.

“A lot of them are having a very hard time emotionally,” MacKay said. “Some just cry and say. ‘I just can’t do it today. I’m going to lose it anyway so I will get back to you.’ But there’s terrible despair.”

Poughkeepsie is home to several dozen community groups and social service organizations that serve the mid-Hudson Valley, a region roughly midway between Albany and New York City. Here, as elsewhere in the country, the decline in homeownership has strained agencies that help the homeless, according to Silverii.

“Once people lose their homes, then (the state Department of Social Services) has to put them up and there’s a financial drain on the community just to support them,” she said. “Not to mention the loss of jobs and dislocation from children's schools and all of things that go along with it. It affects the whole community when people are losing their homes.”

Though some lenders are working out more affordable loans with homeowners at risk of default or foreclosure, progress is painfully slow. At Hudson River Housing’s NeighborWorks HomeOwnership Center, director Mary Linge says she’s working with a number of clients whose lenders are in the process of negotiating new terms — but none have have yet finalized more manageable payments.

Using funds provided by the county government and a local non-profit community group, the center recently hired another counselor to help with the increase in traffic from homeowners facing default or foreclosure. Dutchess County Executive William Steinhaus says local governments should be working on solutions that don’t rely entirely on tax dollars.

“I see us in a partnership role where there’s a shared responsibility and a shared effort to help those that maybe reasonably need some kind of assistance,” he said. “These require community solutions — not just county government solutions.”

A few state and local governments have begun to offer direct assistance to homeowners to keep up with their mortgages. For most part, these efforts have been limited to loans of $5,000 or so to make up missed payments.

Attention also has turned to trying to prevent future foreclosures. Community groups like Hudson River Housing are offering classes and providing counseling to help first-time home buyers avoid the traps that have tripped up many of those who are now losing their homes.

“It’s been shown that that people who are counseled, across all income levels — upper, middle, all the way down — become better homeowners and have a much, much lower rate of delinquencies and foreclosures,” said Albert Desalvo, community reinvestment officer at M&T Bank, a community bank with three offices in the city. “And one reason is because they don’t get snookered into these bad loans.”

New York is one of a handful of states that are tightening regulations on the mortgage industry to try to prevent lenders and brokers from selling more ruinous mortgages. Beginning this year, all mortgage brokers have to be licensed, submit to criminal background checks and take 18 hours of training, including an ethics class.

In November, New York Sen. Charles Schumer’s office estimated 50,000 borrowers in the Hudson Valley region had subprime loans totally nearly $15 billion. Roughly 30 percent of those borrowers qualified for cheaper, safer prime loans, according to that report.

Schumer is among those who have called for federal licensing and regulation of brokers. But it’s not clear whether those measures will be included in the final version of a housing bill that has been working its way through Congress for the past year.

Community reinvestment specialists like DeSalvo also say that without tough regulations, the lending abuses that contributed to the rise in foreclosures won’t go away.

“We’ve seen this coming for five or six years now,” he said. “When you get mortgage brokers doing these mortgages and tying in with appraisers and title companies and then selling the whole package directly to investors that are not regulated — that’s really where the focus needs to be. You’ve got to regulate how all this money churning is going on, and you’ve got to regulate mortgage brokers.”

And while lending standards have tightened, the mortgage marketing machine is still in full swing.

Last month, after spending over a year trying to get out from under her mortgage and losing her home to a short sale, Bolds got an e-mail pitch from a lender asking her if “paying less interest each month (would) make life just a little bit easier this spring.”

As mortgage defaults and foreclosures continue to rise, the impact is spreading well beyond those who are losing their homes.

In communities across the country, msnbc.com readers report that local governments are coping with shrinking tax rolls, lenders are saddled with more foreclosed homes than they can sell and empty homes in many neighborhoods are being vandalized.

Like everything associated with the nation's housing crisis, the fallout from foreclosures is very local, a fact confirmed by hundreds of e-mails from readers in msnbc.com's Gut Check America. Some regions appear to have escaped relatively unscathed. But in hard-hit states like California, Arizona and Florida, readers report that some neighborhoods are becoming virtual ghost towns.

In Indian Harbour Beach, Fla., “lots of homes have been abandoned by their owners, and many people are going into bankruptcy,” wrote a reader named Robert. “Whole condo projects sit half-finished and rotting in the Florida sun. On some streets almost half the homes are empty. Many people have lost 40-50 percent of the value of their homes. “

Others report a different kind of isolation; many of those losing their home to foreclosure are reluctant to confide in family or friends until the process is complete. Some neighbors are unsure how to respond.

“My community is an upscale middle-class community; I am going through foreclosure right now,” wrote a woman from Pennsylvania. “The neighborhood is very quiet, waiting for the next fall to happen. People do not even talk to each other. They wave but hardly say a word.”

In South Lyon, Mich., life is getting lonelier as more houses are abandoned in Jose's neighborhood.

“I live next door to empty houses instead of neighbors and friends,” he wrote. “It is an overwhelming feeling of dread. You wonder if your family is next."

In hard-hit neighborhoods, the glut of foreclosed homes has not only sent prices crumbling — the houses themselves are also falling down, according to a number of readers from around the country.

“Our neighborhood is going down the tubes because the properties are going unsold for so long that they're falling into disrepair,” wrote Leslie from Albuquerque, N.M. “It's a mess.”

In Memphis, Tenn., Angela reported that her neighborhood was dotted with “growing weedy yards, windows with papers taped to them and broken. There are about five or six such homes in my post-World War II subdivision. And these are NOT expensive homes!”

“My neighborhood is filled with renters who could care less about the parks or the appearance of the homes,” wrote Joe Brogdon, of Queen Creek, Ariz. “There is a smaller home near mine that has no windows and it is barricaded with plywood to prevent any more vandalism to the house. Many of the lawns are not being taken care of, which does not help the situation for resale or pride of ownership.”

Some houses have been damaged by angry, frustrated homeowners who lose their homes to foreclosure, according to Mark in Stockton, Calif., where the foreclosure rate is among the highest in the country.

“This city has so many foreclosed homes that are trashed there is an ad on local TV offering up to $1,000 to people not to trash their home before they are kicked out of it,” he wrote. “The problem here is grave.”

In other cases, abandoned homes are more than an eyesore. Readers in some hard-hit areas report a rise in vandalism, squatting and other crime.

“Vandals have been hitting the empty homes that have been affected by foreclosure in my area,” wrote Gloria of Los Angeles. “With summer around the corner and kids out of school, I just worry about fires starting or other serious problems happening.”

To prevent the blight that can follow a high concentration of abandoned housing, some local governments are using tax dollars to buy up properties and fix them up — or tear them down.

“Our local government is planning to demolish vacant homes,” write Susan, of South Bend, Ind. “It is going to cost the city more money, which in turn creates more tax burden for South Bend's residents. It is a vicious cycle.”

With federal housing relief stalled in Congress, some local governments have stepped up with programs offering small loans to help strapped homeowners head off foreclosures. But as the housing market continues to slide, declining property tax revenues are squeezing town and city budgets.

During the housing boom, many municipalities enjoyed a windfall in property taxes as the value of homes and other properties soared. Now as those values have fallen back, property owners are challenging pricey assessments.

Some local governments facing shrinking tax revenues are resorting to cutting services.

“We have terrible local road repair, our parks need landscaping and maintenance,” said Jose from South Lyon, Mich. “We volunteer our time to the village public park district and mow small park lawns with our own gas and equipment. Our fire department is going back to mostly volunteer, and we may have to lay off some police officers.”

Kristen Cunningham, director of Community & Economic Development in South Lyon, took issue with Jose's account.

"We are a full service city that no doubt has been affected by the foreclosure problems. It obviously is a challenge everywhere," she wrote in an e-mail repsonding to our story. 

Cunningham said South Lyon has always had a volunteer fire department and is not laying off police officers. "In addition," she said, "the city is in good solid financial condition and regularly maintains its own park system through general fund monies. There are no volunteers mowing any of our parks with their own equipment and gas."

A report last November by the U.S. Conference of Mayors forecast losses of $166 billion this year for 361 metropolitan areas.  The estimate included lost tax revenue, lost jobs and slower consumer spending but not the financial toll of increased crime, fires and building code violations.

Some cities have filed lawsuits against lenders to try to recover costs associated with what local officials claim is predatory lending. In other cases, cities and towns are looking for other ways to raise enough taxes to maintain local services.

“My hometown is broke, and the devaluing of the property tax base is cited as one of the reasons,” wrote Bill, form South Gate, Calif. “If the voters pass a 1 cent per dollar sales tax in June, to prevent cutbacks in services, we will have one of the highest rates (9.25 percent) in the country."

In Memphis, Tenn., Wayne wrote that “the city and county are both hurting due to the lost tax revenue on the foreclosed homes. This also has had a severe setback on the amount of tax-based funds allocated to education, fire and police protection.”

Homeless shelters also report an increase in traffic. Some new arrivals are renters whose landlords defaulted on their loans and lost the property to foreclosure. The National Coalition for the Homeless recently surveyed state and local homeless coalitions and found that 61 percent reported an increase in homelessness since last year.

“It has been horrible,” said Earlinda, a Realtor in Reno, Nev. “We now have a ‘tent city’ because the homeless shelters are overloaded."

In some communities with high foreclosure rates, lenders are having a tough time selling the properties they’ve taken over. The problem is apparently most severe in large developments that were under construction when the housing bubble burst.

“There are well over 500 houses for sale in an area with approximately 5,000 homes,” said Rick from New River, Ariz. “Most are spec homes for sale with sale prices dropped from $100,000 to $200,000. Banks can’t even find buyers at auctions.”

Some real estate agents report that when they do find buyers for foreclosed properties, lenders are so swamped they’re having a hard time answering the phone. One San Diego Realtor reported that agents have taken to getting up early to leave voice mail for lenders before their mailboxes fill up.

In Pinellas and Pasco counties in Florida, home prices have dropped as much as 40 percent, according to Lorraine Seddon, an agent in Dunedin, Fla.

“Banks that should be glad that a contract came through take so much time to respond that buyers buy other homes, leaving these (foreclosed) homes to rot,” she wrote.

The housing slowdown has also hurt local businesses in hard-hit areas, forcing layoffs among builders and mortgage lenders. Some of those in the housing industry who still have jobs are worried that they could be next.

“I work for a much more conservative bank than most, but all of our income has suffered greatly,” write Chris, of Shawnee, Kan. “We are constantly worried that the doors at work will be closed at any moment, and it is a terrible way to live day to day. From what I can tell, things aren't getting better anytime soon.”

Local businesses in hard hit areas are also watching business dry up.

“I sell building material to home builders,” wrote Ed, from Georgetown, Del. “It is very scary what’s going on. I’ve seen a lot of builders go out of business.”

To be sure, readers in some areas of the country — from Watsontown, Pa., to Alto, N.M. — reported that their communities have been spared the impact of the housing downturn, at least so far.

“Property values have not gone down,” wrote Ken of Custer, S.D. “People are still buying and building.”

Some readers reported they were benefiting from foreclosure's fallout — including dozens who said they were now able to afford a home in a buyer’s market.

“I just moved here, and I picked up a nice house for half of what it sold for in 2005,” wrote Doug, from Phoenix, Ariz. “Thanks, Arizona.”

One reader wrote that rising foreclosures had created new employment opportunities.

“The foreclosure crisis has been a boon to me and my family,” wrote Lee, of Riverside, Calif. “After three years of unemployment, I have been working for the past year cleaning and maintaining foreclosed houses and preparing them for sale. It has provided work for me that wouldn't have been there otherwise.”

But other readers reported that their personal and professional lives were on hold because they couldn’t sell their house to take a new job or fund their retirement.

“I recently moved for a new job and am trying to sell my home,” wrote Karen, from Evans, Colo. “My Realtor told me that all of my competition are foreclosures and bank short sales. I will most likely take a $20,000 loss on my house.”

“My wife and I are divorcing, but we will have to live together as roommates,” wrote Mick, from Reno, Nev. “We have a fixed-rate loan, so that is not the issue. It's simply that the implosion has depressed house prices so much that we can't sell our house and move on.”

Despite the heavy headwinds of higher prices for food and gasoline, falling home prices and worries about losing their jobs, most American consumers are still finding a way to pay the bills. But as economists, business executives and government officials try to figure out where the economy is headed, they’re also wondering: How long can consumers keep this up?

Consumer spending, which accounts for roughly 70 percent of U.S. economic activity, continues to grow, but barely. Personal consumption was up 1 percent in the first quarter after adjusting for inflation, according to Thursday's report on the gross domestic product. But the pace of spending growth has slowed sharply from 2.3 percent in the fourth quarter of last year.

Income growth has also slowed, edging up just 0.2 percent in April — about half the rate logged in March, according to government figures released Friday. The gain would have been weaker without the boost from the initial round of rebate checks hitting taxpayers' mailboxes. Friday's report also showed that consumer spending also slowed to a crawl in April - up just 0.2 percent. After factoring out inflation, there was no gain at all.

Consumers are is no mood to spend if they don't have to; consumer confidence fell to a 28-year low in May, according to a Reuters/University of Michigan survey released Friday. The reading was the lowest since June 1980, when the U.S. economy was in shambles and short-term interest rates reached 20 percent after a decade of rapidly rising prices, erratic growth and high unemployment.

Today, rapidly rising prices for gasoline and other commodities are one of the main reasons Americans are so pessimistic about their finances. But while a number of economists — and many consumers — believe the U.S. is already in a recession, the latest data don’t yet point to an economy moving in reverse. So why are consumers so gloomy?

One reason is that after four straight months of government reports showing job losses, Americans are getting more worried about their jobs, according to Ken Goldstein, a labor economist at the Conference Board, which tracks consumer sentiment.

“If we continue to get even small decreases in jobs, these consumer confidence numbers are not going to turn around this summer or even this fall,” he said.

Though the job market is weakening, it’s still fairly strong by historical standards; the unemployment rate, at 5 percent, is well below levels reached in past recessions. Unemployment peaked at 6.1 percent in the relatively mild recession of 2001; it hit 7.8 percent in the 1990-91 recession and topped out at 10.8 percent in the 1981-82 downturn.

But the job figures don’t tell the whole story: Though unemployment is still low, incomes have not risen as fast as the economy has grown since the last recession. Gains in hourly wages don’t tell the whole story, according to Jared Bernstein, who follows labor issues at the Economic Policy Institute.

“One of the big stories in this recovery was that families weren’t able to find enough hours of paid work to get their income back in line," he said. "So the median family income as of 2007 was about $500 below where it was in 2000.

Even as wages lagged, consumer spending has increased faster than the overall economy — it now makes up roughly 71 percent of GDP — up from 64 percent in 1998.

To finance spending during that period, Americans leaned more heavily on credit cards, dipped into retirement savings and turned to their biggest source of cash — the rising value of their homes. Over the past decade, homeowners have tapped close to $1.5 trillion in rising home prices by taking out bigger mortgages to convert home equity into spending money.

Now, with home prices falling and lenders pulling back, that gigantic piggy bank is running dry. As the housing slump continues, the impact on spending worsens, accoridng to Robert Brusca, chief economist at Fact and Opinion Economics.

“The problem is what it does to the people who live in homes whose values are falling and what it does to their willingness and ability to consume goods," he said.

The housing slump has also created a lending slump. Mortgage lenders have less money to lend after investors who bought bonds backed by faulty mortgages got badly burned. Now lenders are a lot choosier about who they’ll lend to; From the peak of the lending boom, the flow of mortgage credit has roughly been cut in half, according to Brian Bethune, an economist for Global Insight.

Until mortgage lending picks up again, the housing market will have a hard time getting back on its feet. But until home prices stop falling, lenders are going to remain leery about writing a mortgage on an asset that is still losing value.

“As long as the housing market is weak the lending is not going to be there,” said Bethune. “And as long as the lending is not there the housing market is going to be weak.”

A rise delinquencies and other consumer credit problems have also begun to crimp the flow of car loans, according to Richard Apicella, who tracks car lending at BenchMark Consulting International.

“Maybe they've had a repossession in the past, or maybe they've had unfortunately a foreclosure, or the debt-to-income (ratio) that they're carrying is much higher,” he said. “When banks - which have fewer funds to lend - look at the type of person they can lend money to, fewer and fewer people are going to qualify."

With home equity shrinking and lenders pulling back, government policymakers are running out of options. Despite big cuts in short-term interest rates by the Federal Reserve, rates on many important consumer loans like mortgages and credit cards haven't fallen.

And the Fed’s rate-cutting phase appears to be coming to a close. If food and energy prices keep rising, the central bank may have to reverse course before consumers have stabilized their household budgets. That would leave the Fed with the difficult choice of raising rates to fight inflation — or leaving rates low to try to keep consumers spending.

"The adverse feedback loop that the Fed fears most — namely that a continued sharp fall in house prices produces by a clampdown in bank lending, which then feeds back into outright falls in consumer spending — that key downside risk is still very much in play," said Richard Iley, a senior economist at BNP Paribas. “So it’s very difficult juggling act for the Fed."

Launched by the White House in October to head off a rising tide of home foreclosures, the Hope Now Alliance said this week that it has helped over a million troubled borrowers trying to keep their homes. But critics of the program say it’s not clear how many of those homes will be saved over the long run.

Now, with foreclosures still rising, calls for a broader government and industry response are coming from community groups, consumer advocates, members of Congress and, most recently, Federal Reserve Chairman Ben Bernanke.

“It’s mostly a lot of hope and unfortunately not a lot of accomplishment at the moment,” said John Taylor, CEO of the National Community Reinvestment Coalition, which works with community groups to help homeowners. “I think there’s a great deal of exaggeration about what the impact has been. The real measure is: How are the foreclosure rates doing? The truth is the foreclosure numbers continue to rise.”

Fresh evidence of the deteriorating outlook came Thursday in a report showing that mortgage delinquencies - homeowners who are falling behind on their payments - rose to the highest levels in 23 years in the last three months of 2007. Borrowers who are delinquent for more than 30 days risk falling into default, which is the earliest state of the foreclosure process.

Home foreclosures soared to an all-time high in the final quarter of last year, according to the Mortgage Bankers Association.

Falling home prices have also added to the squeeze on borrowers, many of whom are seeing the value of their home dropping below the amount they owe. The latest Standard & Poor's/Case-Shiller index showed U.S. home prices plunging 8.9 percent in the final quarter of 2007. As a result, Americans' percentage of equity in their homes has fallen below 50 percent for the first time on record since 1945, the Federal Reserve said Thursday. That marks the first time homeowners' debt on their houses exceeds their equity since the Fed started tracking the data in 1945.

Economists expect this figure to drop even further as declining home prices eat into the value of most Americans' single largest asset.

Moody's Economy.com estimates that 8.8 million homeowners, or about 10.3 percent of homes, will have zero or negative equity by the end of the month. Even more disturbing, about 13.8 million households, or 15.9 percent, will be "upside down" if prices fall 20 percent from their peak.

That pace of foreclosures is expected to remain high this year as loans issued in 2005 and 2006 continue to reset to higher payments that many borrowers will be unable to afford. Many of these adjustable loans were sold with assurances that the borrower could refinance before the higher “reset” payment kicked in. But with home prices falling, many owe more than their house is worth, eliminating the option of conventional refinancing. If the economy worsens, and more people lose their jobs, that could increase the number of families at risk of losing their homes.

On Monday, Bernanke told a group of community bankers that some 1.5 million subprime mortgages are scheduled to reset from just above 8 percent to about 9.25 percent, raising the average monthly payment by about 10 percent, to $1,500. Conventional 30-year fixed rates are currently at about 6 percent.

“The situation calls for a vigorous response,” said Bernanke.

The Hope Now Alliance said this week that more than a million homeowners have been helped with some form of loan modification or repayment plan. But critics note those statistics don’t indicate how many homes ultimately will be saved from foreclosure. A recent report from the Mortgage Bankers Association of third-quarter foreclosures found that some 40 percent of subprime borrowers who lost their homes previously had succeeded in modifying their loans or negotiating a new payment plan.

“A repayment plan or a one-month deferment when the loan is not affordable really doesn’t do much,” said Ira Rheingold, executive director of the National Association of Consumer Advocates.

Officials at Hope Now did not return several calls for comment.

Hope Now’s initial success has been in bridging a communications gap between borrowers and lenders. Many homeowners have had a hard time finding reaching someone at their lender with the authority to negotiate a loan modification. For their part, lenders report that some borrowers in trouble have ignored letters and phone calls intended to initiate a discussion about new mortgage terms.

But some consumer groups express concerns that the heavy representation of financial services companies on Hope Now’s board may mean the program is helping lenders more than borrowers. Bernanke has said some lenders need to add more staff to keep up with the rise in delinquencies and loan defaults; Hope Now provides a valuable service to lenders by collecting and assembling information about borrowers in trouble.

But the rising volume of calls fielded by Hope Now staffers has meant that some homeowners may not be getting the in-depth counseling they need to consider all of their options, according to Susan Keating, CEO of the National Federation of Credit Counselors.

“The fact that the (Hope Now) Alliance secured very broad participation from the mortgage servicer and investor communities but utilized very limited resource from the counseling sector is really very unfortunate,” she said. “Because we’re using very little counseling resources to combat a very large problem.”

Keating says that so far only a handful of the NFCC’s 114 member agencies, with 900 offices around the country, have been tapped to help with the government’s foreclosure prevention program.

“We’re now into March,” she said. “This is not something that we’re seeing on the horizon. We don’t even have an endpoint yet. So why would you be doing this incrementally?”

That counseling is critical because the process of modifying loan terms still faces some thorny problems resulting from the multiple players involved in the financing packages sold at the height of the lending boom. Relatively few lenders held onto individual mortgages or even sold them one at a time to other lenders. That means many homeowners’ point of contact is a so-called “loan servicer” who represents the hundreds of investors who own the securities backed by individual mortgages.

Those servicers are reluctant to reduce a borrower's principal or interest rate for fear of being sued by investors who would see lower returns on their mortgage-backed securities. Though those investors may ultimately lose more if the underlying loans default, it’s impossible to predict just how many mortgages will stop paying. If interest rates fall and the housing market recovers, investors could later argue in court that servicers should have taken a harder line on modifying loans.

Negotiations between homeowners and lenders are also hampered by the widespread use of so-called “piggyback” loans — second mortgages that were used to finance nearly 40 percent of home purchase in 2006. Both lenders in such a case typically need to agree to a loan modification.

But if the total amount of loans outstanding is greater than the value of the house, the first mortgage is paid off first when the home is sold, often leaving the holder of the second mortgage with nothing. So many second mortgage holders figure they have nothing to lose by rejecting modifications and hoping the homeowner figures out how to make their payments long enough for housing prices to recover.

Unfortunately, the ongoing erosion of home equity will likely make matters worse before they get better. Homeowners' percentage of equity slipped to a revised lower 49.6 percent in the second quarter of 2007, according to the Federal Reserve's quarterly U.S. Flow of Funds Accounts, and declined further to 47.9 percent in the fourth quarter — the third straight quarter it was under 50 percent.

The total value of equity also fell for the third straight quarter to $9.65 trillion from a downwardly revised $9.93 trillion in the third quarter.

Home equity, which is equal to the percentage of a home's market value minus mortgage-related debt, has steadily decreased even as home prices jumped earlier this decade due to a surge in cash-out refinances, home equity loans and lines of credit and an increase in 100 percent or more home financing.

All of which has some officials calling for more drastic measures.

The most recent came from Bernanke who offered the banker's group tough medicine: He asked them to forgive some of the principal on loans in which homeowners have little or no equity.

“When the mortgage is ‘under water’ a reduction in principal may increase the expected payoff by reducing the risk of default and foreclosure,’ said Bernanke. But “temporary palliatives … may only put off foreclosure and perhaps increase the ultimate costs.”

Another idea, championed by Sheila Bair, Chairman of the Federal Deposit Insurance Corp., would involve an across-the-broad freeze on interest rates that are scheduled to jump to above-market rates and create unsustainable monthly payments. She has criticized temporary loan modifications as “kicking the can down the road” if they don’t provide long-term solutions.

Congress recently expanded the borrowing limits for government-sponsored agencies Fannie Mae and Freddie Mac to provide more capital to the mortgage markets. But those measures won’t help existing homeowners with too little home equity to qualify for a conventional refinancing.

Others have suggested creating a new agency — similar to the Resolution Trust Corp. created after the savings and loan collapse of the 1980s, or the Depression-era Home Owners' Loan Corp. that bought out troubled loans from lenders and replaced them with new, more affordable loans for borrowers.

So far, political opposition to a “bailout” has prevented broad government intervention. Last week, Treasury Secretary Hank Paulson repeated the White House’s opposition to using taxpayer dollars to provide relief, saying lenders should be allowed time to work out solutions on their own. But even if the political wind shifts soon, relief probably won’t come soon enough for hundreds of thousands of homeowners.

“It's too late to try to create a new agency, and then build it, staff it up, train the staff appropriate for it and try to address this,” said Taylor. “That’s going to take a year. We don’t have another year of 200,000 foreclosures a month."

That, he said, is a "guarantee" for a recession.

All of these proposals face a fundamental hurdle: the backlash from homeowners who are struggling but still keeping up with their payments. With no standard guidelines for who qualifies for a break on their loans, home buyers who didn’t get in over their heads will want to know why they can’t get a break from their lender too.

"The challenge comes in when the existing homeowners are performing and they want similar reduction in loan amounts and feel punished for making their payments,” said Michael Zoretich, vice president of CK Mortgage, a mortgage brokerage in Brookings, Ore. “They may view the failing borrower as receiving rewards not offered to them.”

The recent acquittal of actor Wesley Snipes on tax fraud charges is being taken as a victory by a vocal band of tax “protesters” who have assembled all manner of arguments that income taxes are illegal.

Their reaction is not surprising. The wide variety of stunningly fanciful arguments against the legal validity of the U.S. tax code have one thing in common. They all selectively ignore one important point: No court has ever held in their favor.

I heard that there is no law that requires you to pay your tax return(s), as stated in the movie "Zeitgeist," by numerous former IRS agents. Is this true?
— Robert H., Hanalei, Hawaii

The breadth and depth of delusional nonsense offered up in this popular YouTube video — and others like it — is simply too vast to cover in this column. Suffice to say that "Zeitgeist" is the "Gone With the Wind" of its genre. It's a comical collection of conspiracy theories that ties together Christianity, the attacks of 9/11, and the Federal Reserve Bank. If there were an Oscar for Best Picture to Connect Completely Unrelated Dots with a Straight Face, this one would get my vote.

While the “taxes are illegal” myth plays only a minor role in this video non sequitur posing as truth, the Snipes case seems to have revived this piece of misinformation with readers. The reaction to the case also confirms for us how seriously out of touch tax “deniers”  are with the real world that the vast majority of hard-working Americans lives in.

As they do in all of their arguments, the tax crazies celebrating Snipes “acquittal” have once again conveniently overlooked an important detail. While the jury let him off the hook for fraud, it found no basis whatsoever for Snipes’ novel legal arguments that he didn’t owe taxes. His own lawyers called the idea “crazy” and “kooky.”  But the jury bought his defense lawyers’ arguments that Snipes committed no fraud because he actually believed the ridiculous legal interpretations advanced by promoters of these absurd fairy tales. (One of those promoters told the court it has no authority over him and he'd rather sit in jail than argue his case.)  In the end, Snipes was convicted of not paying his fair share, ordered to cough up $17 millions in back taxes, and still faces three years in jail. Some “victory.”

Ever since the British tried to lead a little too heavily on American colonists with taxes on tea and whiskey, the United States has had a long and colorful history of tax protests. Modern tax “deniers” have come up with an impressive collection of twisted arguments to support the idea that Uncle Sam has no right to ask American citizens to pay for the services their government provides them.

As with many of these theories, there is often a seed of truth upon which a giant oak of nonsense is grown. One of the more popular notions is that taxes are unconstitutional. It’s true that the history of the U.S. income tax is not without some serious legal twists and setbacks. Congress botched one attempt with an amendment to an 1894 bill on tariffs calling for a 2 percent income tax; it was struck down by the Supreme Court the following year. The high court’s legal objections were then overcome with the enactment and subsequent ratification of the 16th Amendment in 1913.

Not so fast, say the tax nut jobs: the 16th Amendment wasn’t properly ratified. Others argue that freedom of speech or religion shields them from owing taxes. Many claim that the term “income” is not properly defined in the tax code. Because failure to pay taxes comes with a threat of jail time, some argue that tax collection is a form of illegal extortion.

All of these inanely creative theories make for fun reading and might actually be amusing if they didn’t clog up the courts with frivolous drivel that wastes everyone’s time. For all the effort devoted to trying to thwart the tax code through “legal” arguments, not one court has upheld a single case based on any of these theories.

Until that happens, we plan to keep filing our annual return. No doubt the Internet will continue to offer a valuable forum for believers of these schemes. We can only hope that those who act on them will find another appropriate setting to discuss the rightness of their cause with other like-minded lunatics: federal prison.

Is using the services of a credit counselor a good idea or will it hurt my credit in the long run?
— Lester J., Glendora, Calif.

Working with a counselor is a great idea — as long as you deal with an accredited counselor. Ask if they’re certified by the Department of Housing and Urban Development (HUD). Or go to the National Federation of Credit Counselors www.nfcc.org to find an accredited counselor near you.

Going to a counselor by itself won’t hurt your credit. If you have fallen behind and can’t catch up on your own, they may approach lenders (with your approval) to work out an alternate payment plan. In some cases, that could hurt your credit, but the counselor will work with the lender to minimize that impact. It’s a lot better than falling so far behind that you have take more drastic measures — like, say, filing for bankruptcy.

Make sure you get someone who is certified. There are a lot of crooks out there who claim the “erase your debt” or “refinance” it by rolling it up into a bigger loan and charging you more interest. These folks will lure you in with promises of a lower monthly payment. What they don’t tell you is that the way they get the monthly payment lower is by stretching out the term of the loan for decades, which means you pay much more interest over the life of the loan.

So give it a try. The sooner you get started, the sooner you’ll be out from under.

Money doesn't just disappear: where did it go (in the housing bust)? The developers and builders got paid by the banks, correct? Are the banks losses not the builders gains?
— Jay, Raleigh, N.C.

It’s true that the money behind the mortgages used to fuel housing boom came from lenders (and investors who bought into pools of mortgage loans that were shopped up as securities like shares of stock.) 

Not all of that went to the builder or owner of the house bought with that mortgage. Some of it went to the mortgage brokers — in the form of fees and commissions. Then Wall Street took a nice cut when the bundled the mortgages and sold them off.

And yes, it's true that some of it went to builders and homeowners who sold their houses during the height of the boom. When a buyer uses a $250,000 mortgage to buy a house that’s really only worth $225,000, the seller gets a $25,000 windfall because the market “overestimated” how much it was worth. Or, in some cases, the estimate was cooked up by an appraiser who inflated the amount to please a lender or mortgage broker. (Some of these bad actors have been convicted of fraud.)

The bulk of the money that “disappeared” is now showing up as losses by those lenders an investors; some $100 billion so far, and the story isn’t over yet. Much of that represents a paper profit that may never have existed.

As long as house prices keep falling, more builders or home owners will find their houses worth less that the loan they took out to build or buy it. Selling the house won’t help. If the loan principal is more than the market value, the builder or homeowner gets nothing and the banks gets what’s left. And if market value is less than loan value (which is getting more common as market prices fall) the bank loses too.

Money may not disappear, but market value does.

As the White House and Congress work to head off a recession, fresh data out Tuesday points to further trouble ahead for the main cause of the downturn — a housing market that shows no signs of hitting bottom.

Home prices plunged by a record 8.4 percent in November, according to a composite index based on 10 U.S. cities tracked by Standard & Poor's. It was the eleventh straight monthly decline for the so-called Case-Shiller index.

"Nothing in these numbers suggest a bottoming out. The numbers universally are disappointing," said David Blitzer, S&P's managing director and chairman of the index committee. "Maybe when we get into the spring/summer home-buying season and with lower interest rates, maybe it will all come together."

A separate report showed that mortgage foreclosures surged in 2007 as many homeowners found themselves unable to keep up with sharp increases in mortgage payments and unable to refinance because their homes had lost too much value. Some 1.3 million homes were the subject of a foreclosure filing, up about 80 percent from 2006, according to RealtyTrac, a Web site that tracks foreclosures nationwide. More than 1 percent of all U.S. households were in some phase of the foreclosure process last year, up from about half a percent in 2006.

Lenders are also feeling the pain. On Tuesday, Countrywide Financial, the largest U.S. mortgage lender, posted a larger-than-expected loss of $422 million for the latest quarter, as more homeowners fell behind on payments. Adding its name to a long list of mortgage lenders that have gone out of business or been sold, Countrywide agreed this month to be acquired by Bank of America for roughly $4.3 billion.

Despite falling interest rates and some $100 billion in cash pumped into the global banking system by the Fed, credit remains tight as lenders worry about the risk of further losses from bad mortgage debts. Unless the tide can be turned to stop a coming wave of mortgage foreclosures, rising loan defaults this year will dump more empty houses on a market already glutted with too many. So far, tumbling mortgage rates have done little to revive the housing market.

New home sales plummeted last year by the biggest amount on record — down 26.4 percent to 774,000, the Commerce Department reported Monday. The median price of a new home edged up only 0.2 percent in 2007 to $246,900, the worst performance since prices slipped by 2.4 percent in the 1991 housing downturn.

With more than 1.8 million mortgages scheduled to reset to higher rates this year and next, the outlook for the housing market remains bleak as more foreclosed homes are put up for sale. A late-year surge in foreclosure filings suggests that many are in the initial stages of the foreclosure process, RealtyTrac said.

“It does appear that we’re seeing a new batch of properties enter the process,” said Rick Sharga, RealtyTrac’s vice president of marketing.

About a quarter of all subprime mortgages are in default, resulting in billions of dollars in losses for buyers of securities backed by them. Lenders and investors already have written off some $100 billion in losses, and it’s not clear how high the final tally will go.

The mortgage business boomed from 2002 to 2006, generating lucrative fees for mortgage brokers, lenders, appraisers, credit rating firms, investment banks and investors who bought shares in pools of loans bought from lenders.

At the height of the boom, lenders offered easy terms that included mortgages approved with  little or no documentation of the borrowers’ savings or income.  In some cases, these so-called “liar loans” inflated a borrower’s financial abilities to make their mortgage payments. Loans were also approved at owner-occupied interest rates to homebuyers who had no intention of moving in.

Many of the loans now headed for default were sold with low “teaser” rates that jumped to much higher levels after two or three years; while home prices were rising, mortgage holders were able to refinance before the resets hit. Now, with home prices flat or falling, many borrowers face sharply higher payments on a mortgage with an outstanding balance larger that value of their home.

The resulting wave of defaults has touched off a round of lawsuits among borrowers, lenders and investors. State and federal investigators have also found that some loans were approved based on fraudulent information, and investigations into lending practices are ongoing.

One such investigation, led by New York Attorney General Andrew Cuomo, is looking into disclosures made by Wall Street firms that sold shares in loan pools to investors. At issue is whether investment bankers adequately disclosed the credit risks to rating agencies and investors.

Cuomo recently reached an agreement with Clayton Holdings of Shelton, Conn.,  which analyzes such loans and has agreed to cooperate. Clayton was given immunity from civil and criminal prosecution, although there was no evidence of its wrongdoing.

Clayton reportedly has told prosecutors that beginning in 2005 it saw a significant deterioration of lending standards and a parallel jump in lending exceptions. At issue is what information was given to investment banks and rating agencies about the quality and risk of the loans that were reviewed.

The Federal Reserve's bold three-quarter point cut in interest rates was designed to stem the slide in the stock market and ease widening fears that the U.S. economy is sliding into recession. While the move helped slow a global slide in stock prices Tuesday, the long-term economic impact of cutting interest rates may be limited.

Why? To paraphrase an old campaign slogan, it’s the housing market, stupid.

Though mortgage rates have been low for months, the housing market is still stuck in its worst recession in decades. Even as housing starts continue to fall, the inventory of unsold houses has risen. With prices falling in many parts of the country, buyers are waiting for a turnaround before they start house hunting again. As foreclosure rates have risen, so has the pace of unsold houses being dumped on the market. 

At some point, the housing market will hit bottom. But the timing of that turnaround remains extremely murky — in large part because it’s unclear how many more homeowners will lose their homes to foreclosure this year and next.

Over the next several years more than $1 trillion in adjustable mortgages, written during the height of the easy-money lending boom, is scheduled to reset to higher rates. Unlike conventional ARMs that move lower as market rates fall, many of these mortgages are set to ratchet up to monthly payments that many homeowners won’t be able to afford.

Lenders and investors have already written off roughly $100 billion in losses so far. But no one knows how much more debt will go bad — or who is holding the bad paper. So even after the Fed has flooded the system with money, lenders remain tightfisted for fear that the borrower won’t be able to pay back the loan

“Large money center banks have virtually frozen their balance sheets, reluctant to lend even to good credit,” Scott Anderson, a senior economist at Wells Fargo Economics, wrote in a note to clients Tuesday.

That’s also why the stock market plunge came as a surprise to many individual investors. Though most people think of stocks when they think of the financial markets, the multitrillion-dollar credit market has been ailing since August, when mortgage losses began to hit lenders and investors holding with bad paper. Since then, efforts by lenders and the White House to head off the coming wave of resets and defaults have had little impact.

This is not the first bold move by the Fed to put out the bad-debt fire sweeping through the credit markets. In August, instead of cutting rates, the central bank took the unusual step of offering to buy tens of billions of dollars in loans to take them off lenders’ hands. Though the credit markets calmed down a bit in the fall, reports of continued bank losses in December — including Citibank’s sale of a large stake to raise cash — put lenders and investors back on edge.

Now with the U.S. economy apparently headed for a recession the Fed is hoping to revive it by marking down the cost of money. The hope is that lower interest rates will help spark a new round of borrowing among bargain hunters who may have been waiting like post-holiday shoppers.

But rate cuts generally take at least six months to work their way through the economy. And until lenders get a better handle on the risks of lending — at any price — the Fed’s moves may have only limited impact.

“Central banks only control the price of credit and generally do not control the availability of credit,” said Richard Bernstein, chief investment strategist at Merrill Lynch in a note to clients. “In simple terms, they cannot force financial institutions to either start or stop lending.”

Meanwhile, efforts to head off mortgage defaults have been going slowly. Some lenders have gone out of business or been bought up by larger competitors, slowing the process of identifying borrowers at risk and working out new terms. Others lenders are not staffed well enough to take on the wave of calls from customers, a factor that Fed Chairman Ben Bernanke noted in a speech this month. Some borrowers, fearing the worst, are not responding to calls and letters from lenders offering to negotiate new mortgage terms.

And even when the borrower and lender are willing to rewrite the loan, many of the mortgages at risk were chopped up and sold to investors around the world. Those investors are part of the negotiation, which further slows the process.

As a result, only a fraction of troubled loans facing sharp increases in monthly payments have been salvaged by working out more affordable terms. Of the more than 2 million loans at risk, an estimated 54,000 loans were modified and repayment plans were arranged with another 183,000 borrowers during the third quarter of 2007, according to the Mortgage Bankers Association. During the same period lenders began foreclosure actions on another 384,000 loans.

While the problem may have begun in the U.S. mortgage market, the global stock market sell-off over the past two days has demonstrated that the credit crunch is now a worldwide event. Merrill Lynch’s Bernstein argues that market-based interest rates — over which the U.S. Federal Reserve has little control — are flashing warnings of a “growing global credit pandemic” that is beginning to hit emerging markets and developing countries. The fear is that those countries have weaker financial systems that may not hold up as well as developed countries in a financial storm.

It remains to be seen what the Fed’s next move will be when it meets next week for its regularly scheduled rate-setting session. A lot will depend, of course, how financial markets react to Tuesday's steep rate cut. But even if the Fed continues cutting, and lower rates begin to have the desired effect, they won’t come soon enough to have much impact on current economic conditions.

“At the least in the near-term it shores up confidence,” said Michele Girard economist  at RBS Greenwich Capital. “In terms of the economic impact, none of that will be felt until the second half of this year.”