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How will the government's bailout plan affect home buyers and sellers?

The goal is to enable major financial institutions to unload their troubled mortgage assets so they can more freely lend to people who want to refinance or buy homes.

A stronger flow of mortgage money should then help whittle down the oversupply of homes that has depressed housing prices, contributed to foreclosures and prolonged the housing crisis.

"This is intended to put a floor on dropping home prices, and in theory that should ultimately benefit everybody," said Guy Cecala, publisher of Inside Mortgage Finance.

The impact on mortgage rates isn't clear. Yesterday's upheaval in the financial markets reflected investors' uncertainty about the rescue plan and lifted interest rates on home loans. The rates on a 30-year, fixed-rate mortgage rose to an average of 6.26 percent yesterday after a recent daily low of 5.87 percent, said Keith Gumbinger of research firm HSH Associates. "There has been an upward march for interest rates since the news of the bailout broke," Gumbinger said. Rates dipped below the 6 percent mark in the days following the federal government's takeover of mortgage financiers Fannie Mae and Freddie Mac.

Even if the bailout plan works, its benefits won't come quickly enough for people who are now struggling to pay their home loans or those in foreclosure. There are no provisions in this plan that target them.

Congressional Democratic leaders want to change that. If the Treasury becomes the new owner of billions of dollars in mortgage-backed assets, they say it should force lenders to rewrite loans for troubled homeowners and forgive a portion of their debt.

Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) is pushing the government to come up with a "systematic approach for preventing foreclosure" on mortgages it acquires as part of this plan. Dodd also wants to resurrect a proposal that allows bankruptcy court judges to rewrite loan terms so borrowers in bankruptcy can afford to keep their homes.

-- Washington Post Staff Writers Ylan Q. Mui and Dina ElBoghdady

By washingtonpost.com Editor  |  September 23, 2008; 6:12 PM ET
Categories:  Your Pocketbook  | Tags: bailout, buying a home, selling a home  
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