Who will benefit from the new federal housing act?

— -- Is it a remedy for the worst housing slump the nation has suffered in decades? Or merely a taxpayer-funded bailout that will fail to reverse the plunge in home prices, the surge in foreclosures and the grave threat that overhangs the economy?

The housing act, which won final approval in Congress on Saturday and which President Bush has said he will sign despite some objections, is historic in its sweep and ambition. It aims to provide relief to homeowners, incentives to buyers, guidance to lenders and oversight to vital government-sponsored entities, such as Fannie Mae and Freddie Mac.

Who, really, will benefit? And for how long? Will the legislation make a real difference for those who most desperately need help?

It depends, of course, on whom you ask. The act has plenty of fans. But skepticism abounds, too.

"The bill is not a silver bullet," says Mark Zandi, chief economist of Moody's Economy.com. "We have to string together several platinum bullets."

Yet Zandi endorses the legislation as among the most important steps that can be done now to prop up the housing market.

On paper, the act holds out help for thousands in need:

• Up to 400,000 homeowners at risk of losing their homes to foreclosure.

• First-time buyers who can't afford full down payments.

• States and cities that will receive money to redevelop abandoned and foreclosed homes.

•People in need of mortgage counseling.

•Fannie Mae and Freddie Mac, which own or guarantee nearly half the nation's mortgages and which now have a rescue plan.

But is it enough? Even if 400,000 homeowners can avoid foreclosure — a figure that a few critics dispute — some estimates put the number of potential foreclosures between 2007 and 2012 at up to 6 million

"We're not getting enough for our money," says John Vogel, an adjunct professor at Tuck School of Business at Dartmouth. "Sure, some number of families — 100,000 or 200,000 — will be helped, and that's not insignificant. But it will not address the problem as fully as we have liked."

Vogel notes that those in danger of foreclosure won't benefit unless their lender agrees to reduce the balance on their mortgage; for the lenders, it's purely voluntary.

Not since the National Housing Act of 1934 has legislation addressed a class as large as homeowners, without restricting the benefits to veterans, urban dwellers or low-income people. The 1934 law, which created the Federal Housing Administration and authorized the creation of Fannie Mae, sought to protect homeowners as a group.

The question now is whether the current measure, sprawling as it is, will do what's it's designed to do and serve those it aims to help. Here's a look at six groups that are intended to benefit.

HOMEOWNERS

$300 billion in FHA loans for refinancing

The bill pledges $300 billion in federally insured mortgages to help an estimated 400,000 homeowners avoid foreclosure by refinancing into lower-cost mortgages insured by the Federal Housing Administration. People can benefit if their lenders agree to reduce their mortgage principal. The borrowers must meet certain income caps and share any profit with the government on a sale of the home.

Zandi of Moody's Economy.com says the refinancing provision "highlights why the housing bill is so important."

While some housing advocates and economists applaud the efforts as a major step in rescuing homeowners, some critics question how big the effect will be.

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, notes that 400,000 homeowners are but a fraction of those in need of aid and that foreclosures will continue their ominous climb. Nationwide, 739,714 homes received at least one foreclosure-related notice during the second quarter, more than twice as many as in last year's second quarter.

"The problem," says Vogel of the Tuck School, "is that in order to refinance out of a loan, the lender has to allow it." That means the lenders have discretion to keep for themselves the "better" mortgages and to designate the less promising ones for insurance backing from the government.

Ellen Harnick of the Center for Responsible Lending calls the legislation a mixed bag.

"It will help those people whose loan servicers are willing to accept a write-down on principal," Harnick says. "But it's a very, very small percentage of the coming foreclosures."

HOME BUYERS

$7,500 tax break for first-timers

First-time buyers are already able to take advantage of low housing prices. Now, if they qualify, they can also receive a tax benefit of $7,500 or 10% of the home's purchase price, whichever is less. (The income caps for the full benefit are adjusted gross income of $75,000 for single people and $150,000 for couples who file taxes jointly.)

But will this incentive actually rev up sales in a stagnant housing market?

"The housing stimulus bill will make a significant impact, with the home-buyer tax credit," by drawing in reluctant buyers, says Lawrence Yun, chief economist for the National Association of Realtors.

Other economists take a dimmer view. Baker, of the Center for Economic and Policy Research, agrees that the tax credit will make some difference. But he warns that surging mortgage rates and tighter lending standards will shut out many buyers.

Craig Anapol, a Realtor in Carmel, Calif., and New York, says he thinks the tax credit could make a real difference. "This is definitely going to help in some aspects," Anapol says. "It's still hard to get loans, and mortgage rates are going up. Still, anything positive is going to help."

More potential buyers in the market could ease some of the strain on homeowners who are now trying to sell. Some areas, such as Boston and cities in California, are already showing signs that the market is stabilizing a bit.

Up to 3 million buyers could be eligible for the tax credit, according to the National Association of Realtors.

"It's something that will help, but I'm not sure it will make a substantial difference," says Joel Greenberg CEO of Novadebt, a nonprofit consumer credit counselor. "A lot of people are sitting on the side, unable to move, because there are so many obstacles, such as not having sufficient credit. You have the obstacle of the concern that something you buy now will lose value. A $7,500 tax credit isn't going to do it."

LENDERS

FHA's role could help shrink losses

Lenders have taken a pounding as the mortgage market has deteriorated. Moody's Economy.com estimates that financial institutions will lose $925 billion on assets originated through 2007 — including $525 billion in losses on mortgage loans. So far, financial institutions have announced write downs, mainly on mortgages, of nearly $350 billion.

The American Bankers Association and the Mortgage Bankers Association say the legislation is a first step toward stabilizing markets, calling the Fannie Mae and Freddie Mac provisions vital for market stability.

Banks had a big hand in ensuring that under the bill, troubled homeowners could refinance into FHA-insured mortgages, so long as lenders agree to reduce mortgage principal. To date, lenders and loan servicers have leaned heavily on strategies such as stretching out mortgage payments, rather than reducing loan principal. Bankers say that's starting to change.

"They'll do the calculation; if this is the best way to help avoid a (more costly) foreclosure, they'll avail themselves of this tool," says Steve O'Connor of the MBA.

Bob Davis, executive vice president of the American Bankers Association, says changes to the FHA program are crucial, with government-insured loans now the only options for borrowers with lower incomes or marginal credit scores. Before the real estate bubble burst, the FHA was losing market share to subprime lenders.

But some critics say the legislation goes too far in propping up Fannie Mae and Freddie Mac and shielding lenders.

"The new law will actually encourage lenders to be even more reckless than before," argues Peter Schiff of Euro Pacific Capital. "The government is telling lenders not to worry about the loans they make, because if borrowers do not repay, the government will."

The California Mortgage Bankers Association applauded Congress for making permanent an increase in the size of loans Fannie Mae and Freddie Mac can buy, to 15% above an area's median home price, up to $625,500. That's important in California and other high-cost states.

FANNIE MAE AND FREDDIE MAC/TAXPAYERS

Treasury can spend billions for safety net

The measure for the first time explicitly gives the government's backing to Fannie Mae and Freddie Mac. The hope was to provide stability and confidence to the financial markets, which, the administration said, would help the overall economy. The Treasury has the power to rescue both companies, either through loans or by infusing them with capital.

The Congressional Budget Office estimates that the government could spend $25 billion to bail out the two companies, though the CBO has said it thinks there's a less than 50% chance that either company will need to tap the new credit lines. The legislation raises the federal debt ceiling by $800 billion, to $10.6 trillion, enough to accommodate a potentially enormous bailout funded by taxpayers.

Howard Shapiro, an analyst for Fox-Pitt Kelton, thinks that worries about the two companies' balance sheet are overblown.

"The question is, do they have enough capital to handle all the defaults?" Shapiro says. He estimates that Freddie has about $25 billion more capital than it's required to have and that Fannie has about $26 billion surplus capital.

For investors, Freddie's and Fannie's beaten-up stocks may look tempting. But the bailout bill could still mean some nasty surprises. Freddie Mac now sells for $8.25 a share, 85% lower than 12 months ago. Fannie Mae, at $11.68, is down 81%. Both sport dividend yields of more than 11%. Though Congress deleted a provision that could have required both companies to cut their dividends, a dividend cut — or a suspension of the dividend — is always possible, Shapiro says.

The biggest winner in the bailout bill could be the mortgage market. Fannie and Freddie Mac play a vital role in making sure that there's plenty of money in the mortgage market.

Any threat of their failure "could trigger a meltdown in credit markets that would make the movements in credit markets that we've seen over the last year look like a modest hiccup," Lehman Brothers analyst Bruce Harting wrote in a note to clients. "Needless to say, the impact of a dislocation of that order could cause serious harm to the global economy."

COMMUNITIES

$4B to buy, rehab foreclosed homes

The Center for Responsible Lending estimates that the second-hand effect of foreclosures on communities will result in a property loss of more than $350 billion for 40 million neighbors of foreclosed homes.

The bill offers $4 billion for communities. Localities can use the money to buy homes at a discount and rehabilitate them. The homes are sold to low- and moderate-income families, with profits used for neighborhood development.

"In every major city, local governments are having to deal with vacant homes," says Eugene Lowe, assistant executive director United States Conference of Mayors. "Crime, up-keeping those home, falling home values in the immediate area — a whole host of problems cities are contending with. The $4 billion will very helpful in stabilizing those neighborhoods."

The bill also provides for $180 million devoted to pre-foreclosure and legal counseling to be distributed in grants by NeighborWorks, a national non-profit.

"We're very pleased," says Ken Wade, CEO of NeighborWorks America.

THE ECONOMY

Restoring confidence could avert recession

An overarching hope for the legislation is that in helping prop up the housing market, it can also help the broader economy avoid a deep recession.

Housing travails are a key factor in rising joblessness. U.S. construction employment has fallen by 528,000 since September 2006. The jobless rate for Hispanics, heavily concentrated in construction, has jumped to 7.7% from 5.7% a year ago. Hispanics lost nearly 250,000 jobs from the first quarter of 2007 to the first quarter of 2008 due to the construction slump, the Pew Hispanic Center says.

One looming fear has been whether the housing downturn will sharply erode consumer spending, which accounts for two-thirds of economic activity. And, if so, can the new housing law help reinvigorate spending? The answer may hinge on whether homeowners feel confident their home values will eventually head back up and they can afford to spend more.

As home prices soared in recent years, homeowners rushed to take out home equity lines of credit. Today, as prices fall, home equity lending is faltering.

Homeowners who refinanced Freddie Mac-owned loans in the second quarter of 2008 pulled about $38 billion in equity from their homes, down from $79 billion in the same three months in 2007. Of those refinancing, 9% took out new loans that were smaller than their existing mortgages. Freddie Mac chief economist Frank Northaft calls the trend the biggest "cash-in" since 2005, possibly reflecting tougher lending standards.

Economists are divided about how much the drop in home equity borrowing will affect spending. In a recent interview, Minneapolis Fed President Gary Stern said that while "there may be more to come" the damage to consumption from declining home prices has been "relatively modest."

"There's always the possible concern that this time will be different" or that consumers will be more constricted than economists expect, Stern says. "I don't dismiss that."