By Ben Arnoldy
Staff writer, CSMonitor

(AXcess News) Stockton, Calif. - Nick Terlouw sprays green paint from a garden hose as if he were watering the lawn. The browned-out grass, dead from neglect, turns golf-course luscious in less than 15 minutes. Then it's off to the next lawn for Mr. Terlouw, one of the few people in Stockton - America's foreclosure capital - making serious green out of the bust.

Sometime soon, Terlouw may be visiting the homes of Kevin Smith and Eddie Chavez. These Stocktonians might be in the throes of foreclosure before the next president is sworn in.

Both candidates have ambitious plans for helping struggling homeowners like Mr. Smith and Mr. Chavez. But the candidates differ over how to get lenders to modify loans and over who should ultimately foot the bill for the losses.

Republican Sen. John McCain favors a more aggressive approach of buying up bad loans and reissuing new ones mostly at taxpayer expense.

His Democratic rival, Sen. Barack Obama, would try carrots and sticks to move lenders to renegotiate and swallow much of the losses. Many housing experts find fault with both plans, leaning toward a partial mix of the two.

"It's not that it's a bad idea for the federalgovernment to buy some of this debt, it's just what the price is and what the terms of the deal are," says Stuart Gabriel, director of the Ziman Center for Real Estate at the University of California, Los Angeles. "It would be prudent for the taxpayer to divide the hurt, so to speak, with the lender and the homeowner."

The US mortgage crisis appears only to be deepening. Third-quarter foreclosure filings are up 71 percent over the same period last year, according to new figures released Thursday from RealtyTrac.

More foreclosures could be triggered by job losses, economic downturn, and borrowers unwilling to keep paying mortgages that now exceed the value of their homes.

Smith, a car salesman, faces many of these pressures and is reconsidering his expenses. Between his home and a second rental property, he's $400,000 under water. He recently lost his renter, to boot.

"If the principal balance isn't reduced for everyone, then this situation is going to keep going on," says Smith. He figures within three months he will stop making payments on both mortgages. "Several friends in the neighborhood, they are talking about the same thing."

McCain's plan would purchase, shrink, then reissue mortgages for many people - but probably not Smith. For starters, his loans aren't subprime.

Regardless, McCain's plan wouldn't help on the second home because, according to his campaign website, "no taxpayer money should bail out real estate speculators."

As for the roof over Smith's head, it's now worth roughly $475,000. That's low compared with his $690,000 mortgage, but perhaps too high for a replacement loan insured by the Federal Housing Administration (FHA).

Smith might get more time to cut a deal with his lenders if Obama becomes president. His plan calls for a 90-day moratorium on foreclosures by those financial institutions getting federal bailouts. The idea is to give time for new loan modification programs to get up and running.

"I think it would be delaying the inevitable [unless] there would be help with the balance," says Smith, who says his lender, GMAC Mortgage, "hasn't been too flexible."

He's also considering bankruptcy. Under current law, a bankruptcy judge could rewrite the loan on his rental property but not his main home. Obama would change the law to give judges the ability to rewrite loans on primary homes, too - an idea McCain does not support.

That could help both Smith and Mr. Chavez, an insurance salesman in Stockton. Chavez will probably stop paying his mortgage next month, when his adjustable rate is set to jump from 8.75 percent to 12 percent - more than he can handle.

Just the threat of letting judges modify loans might motivate lenders to cut deals with folks like Chavez. But the idea has its downsides."Our lenders are telling us that as soon as that proposal goes into law, interest rates would go up between 1.5 and 2 percentage points instantly," says John Mechem, spokesman for the Mortgage Bankers Association (MBA).

"Someone has to pay for the [added] risk."

It's unclear if Chavez would qualify under McCain's plan, which wouldn't help borrowers who fudged their loan applications. Chavez admits his documents contain incorrect numbers regarding his ability to pay, but he says his broker inflated them without his knowledge. (story continued on page two)

Page One | Page Two