Mortgage Market Eases For Some But Not For Self-Employed or Jumbo Loan Borrowers

Self-Employed Are Frozen Out of Mortgages
Efforts to Jump-Start Lending Bypass Those Without W-2s; The Trouble With Jumbos

By NICK TIMIRAOS and RUTH SIMON

The government's recent moves to backstop the mortgage market have made it easier for many people with decent credit scores to get a loan. But for many self-employed people -- even those with pristine credit -- the mortgage freeze has yet to thaw.
A reversal of the loose lending practices that led to the banking industry's current woes was certainly expected. But some economists and mortgage brokers say lending standards have become overly restrictive, which could be exacerbating the credit crunch and helping push down home prices further.

Locked Out of a Home Loan

Some self-employed professionals are not benefiting from federal moves to loosen the mortgage market.
The volume of jumbo loans -- those that exceed limits for government backing -- fell by more than 70% for the first nine months of the year from a year earlier.

"Underwriting criteria have swung from foolish ease to tighter than any in modern times," says Lou Barnes, a mortgage banker in Boulder, Colo.
The changes are increasingly frustrating a group of borrowers whom banks once coveted: affluent self-employed professionals such as doctors, lawyers, accountants and small-business owners.

Hubert Noguera, a 38-year-old medical-device engineer who also owns a small business, is one of them. He can't get approved for a loan, even though he has a strong 800 credit score and is prepared to make a 40% down payment on a house near San Francisco in the $800,000-to-$900,000 range. Mr. Noguera says he has assets worth three times the $500,000 loan he's requesting and is in the process of selling his share of a recently inherited residence in Saratoga, Calif., worth $1.1 million.

Banks have turned down the loan because the amount he's requesting appears high relative to the portion of his income that he can fully document -- and they won't consider his other income, says his mortgage broker, Connie Madrid.

"My blood type is O positive. What else do they want?" Mr. Noguera recalls asking Ms. Madrid.

The chief problem for self-employed people is that they don't have W-2 forms from an employer to document their full wages. For proof of income, they must rely solely on their income-tax returns. But income for the self-employed is often understated for tax purposes, in part because they tend to take large business-related deductions. Self-employed borrowers who don't take any big deductions won't likely face the same difficulty getting a loan.

"When you're self-employed, the write-offs that you use help at tax time -- but that means when you apply for a loan, your income won't reflect your cash flow," says Richard Redmond, a mortgage broker in Larkspur, Calif. Lenders are also cautious because nonsalaried workers can see greater volatility in their annual income.

In the past, most self-employed people took out "stated-income loans," which don't require borrowers to fully document their income. Such borrowers typically made substantial down payments, had strong credit profiles and paid a slight premium -- around 0.25 percentage point -- on their interest rates. Defaults were low.

That changed as the loans grew in popularity during the housing boom and expanded beyond their traditional market of affluent professionals. Stated-income loans eventually became disparaged as "liar's loans" because borrowers' incomes were frequently exaggerated.
Many banks have eliminated stated-income loans entirely, and Freddie Mac -- which, with Fannie Mae, is one of two government-held buyers of mortgages -- will end its stated-income lending program designed for self-employed borrowers next month.

"If the market stays as it is, we've frozen thousands and thousands of good borrowers out of the mortgage market," says Peter Ogilvie, past president of the California Association of Mortgage Brokers. "People who've demonstrated they can pay their bills cannot get a mortgage -- and that's people who have homes."

Mr. Noguera's loan hasn't been approved because he receives part of his income from a human-resources consulting business that he also inherited last year, but lenders won't count income from the firm because he doesn't have two years of reported earnings.
"Six months ago, I know I could have done this no problem," says Ms. Madrid, his broker. She says that even the loan officer at Wells Fargo & Co., for example, was surprised that the loan couldn't be approved. A Wells Fargo spokesman wouldn't comment on the particular case, but said in a statement: "Like everyone else in financial services, Wells Fargo has adjusted underwriting standards to effectively manage risk in this difficult credit environment."
This part of the market is tightening despite the government's attempts to jump-start mortgage activity. Earlier this year, it approved larger loan limits for Fannie Mae, Freddie Mac and the Federal Housing Administration. Last week, the government announced it would buy $600 billion worth of mortgage-backed securities and debt from Fannie and Freddie, which helped push down mortgage rates on government-backed loans by a third of a percentage point.
Self-employed borrowers aren't the only ones finding themselves shut out despite having good credit and savings. Lenders have also sharply tightened requirements for so-called jumbo loans, which are too big to qualify for government backing. That's because banks are relying heavily on loans guaranteed by Fannie and Freddie and the FHA, which have loan limits that vary by market from $417,000 to $729,000. Government-backed lending now accounts for 87% of loan volume, according to Inside Mortgage Finance, a trade publication.

At J.P. Morgan Chase & Co., for example, more than 95% of mortgage originations are now sold to a government agency. In certain distressed markets, such as South Florida, J.P. Morgan Chase won't go above a 60% loan-to-value on jumbo mortgages. Overall, jumbo-loan originations declined 71% to $87 billion in the first nine months of 2008 from $303 billion during the same period last year, according to Inside Mortgage Finance.

Those who can get a jumbo loan are finding them very expensive. Rates on jumbo loans averaged 7.49% last week, nearly 1.6 percentage points above the rates on loans eligible for government backing, according to HSH Associates, financial publishers in Pompton Plains, N.J. The gap widened from 1.3 percentage points two weeks ago. In July 2007, the gap between the two was as little as 0.25 percentage point.

Mike Castrichini, a chiropractor in Scottsdale, Ariz., has been caught between the tightened jumbo market and the disappearance of stated-income loans, which he says he's used for more than a decade without any problem. He's been unable to find a lender willing to refinance the $900,000 adjustable-rate mortgage on his primary residence, which he says is worth around $1.1 million now, down from $1.8 million a few years ago. "Nobody will touch the loan," says Steve Walsh, his mortgage broker.

The 42-year-old Mr. Castrichini, who has a solid 787 credit score, owns his two offices and a small strip mall in Illinois. Even if he's approved for the loan, he laments the fact that he is facing a much higher interest rate. "I'm going to have to cut back," he says, expressing concern that he'll be unable to keep his children in private school.
Banks, meanwhile, are tightening their requirements beyond those of Fannie and Freddie. J.P. Morgan Chase, for instance, has set tighter standards than the agencies for loans that exceed 80% of the home's value and has stopped making loans for second homes and condos in Florida, according to a recent investor presentation.

"No one wants to be stuck with a loan," says Mr. Walsh, the Arizona broker. He says underwriters he works with have been told they'll be fired if a loan they originate can't be sold to Fannie, Freddie or the FHA.

Lenders have tighter standards than government agencies because they "usually have a more granular understanding of where credit losses are coming from," says Sanjiv Das, chief executive of Citigroup Inc.'s CitiMortgage unit. Lenders say they are also concerned that Fannie and Freddie will force them to repurchase delinquent loans.
Brokers say there's little borrowers can do to improve their chances of getting a loan right now, but that they can prepare themselves once guidelines ease. The most important steps include maintaining a stellar credit rating and being able to show liquid assets. Borrowers who can't get a jumbo loan will have a better chance at getting a so-called conforming loan -- one not exceeding $417,000, with a higher ceiling in some markets.

Mr. Redmond, the California broker, says he sees enough rejected borrowers with strong credit that he is setting up a $15 million private lending fund targeting those good credit risks. He warns that the inability of creditworthy borrowers to refinance mortgages, particularly those that have rising rates, could spur forced sales and further depress home values.
"Fannie and Freddie can sit on the stoop with buckets of cheap money, but if they have raised the bar too high for the borrowers to get at it, it doesn't matter," he says.

30 Year Fixed Mortgage Rates Headed for 4.5%

By DEBORAH SOLOMON and DAMIAN PALETTA

WASHINGTON -- The Treasury Department is considering a plan to revitalize the U.S. home market that would push down interest rates for loans to purchase a home, according to people familiar with the matter.

The plan, which is in the development stage, would temporarily use the clout of mortgage giants Fannie Mae and Freddie Mac to encourage banks to lend at rates as low as 4.5%, more than a full point lower than prevailing rates for standard 30-year fixed-rate mortgages.

Government officials are under pressure to address falling home prices and mounting foreclosures, which underpin the financial crisis. The Treasury has struggled for months to come up with a plan that would ease the strains on borrowers without appearing to bail out homeowners and lenders.

The plan remains in discussion and may not be made final before the Bush administration's term ends in January. President-elect Barack Obama has said repeatedly that his administration would do more than the current one to help struggling homeowners but he has not offered specifics.

Treasury views this plan as potentially halting the slide in home prices by enabling borrowers to afford bigger loans, thus increasing demand and pushing up home values. The lower interest rates would be available only to borrowers who are buying a home, not those refinancing a mortgage.

Borrowers would have to qualify for a mortgage guaranteed by Fannie, Freddie or the Federal Housing Administration. Those guarantees apply to loans where borrowers can document their income and afford their monthly payments, steering the government away from backing loans considered risky.
The Treasury and the Federal Reserve are already working to bring mortgage rates down through a program announced last week in which the Fed will buy up to $600 billion of debt issued or backed by Fannie and Freddie, along with Ginnie Mae and the Federal Home Loan Banks. That move helped push down rates on 30-year mortgages, and applications to refinance have jumped, the Mortgage Bankers Association said Wednesday.

Benefit To Stocks

In this climate, stocks of banks and home builders drew more investor attention Wednesday, helping the Dow Jones Industrial Average rise 172.60 points, or 2.05%, to 8591.69, despite continued bleak economic news in the Fed's "beige book" survey of regional conditions.
The plan the Treasury is considering would encourage banks to issue new mortgages at lower rates by offering to purchase securities underpinning the loans at a price equivalent to the 4.5% rate.
The Treasury would fund the purchases by issuing Treasury debt at 3%, suggesting the government could make a profit on the difference.
The average rate on 30-year fixed-rate mortgages conforming to Fannie's and Freddie's standards was about 5.75% Wednesday, according to HSH Associates, a financial publisher. That's up from about 5.5% Monday but down from more than 6% before last week's announcement.
The plan is very similar to an idea floated in October by R. Glenn Hubbard and Christopher Mayer, academics at Columbia University's Business School. "I think a program to substantially bring down rates for homebuyers would be an incredibly valuable program, and I think it captures a real part of solving what has been an incredibly challenging dislocation in the credit markets," Mr. Mayer said in an interview. He estimated the idea under consideration could quickly help 1.5 million to 2.5 million people buy homes, giving a major boost to the housing market and broader economy.
The plan also could be good news for banks hit hard by the housing slowdown. In addition to having the government play the role of guaranteed buyer, financial institutions could pocket fees for making loans to buyers able to afford homes at the lower rates. That, in turn, could boost the economy and improve the weak outlook for other consumer loans, such as credit cards, that also are weighing heavily on the banking industry's profitability.
Normally, the rates lenders charge consumers, including home buyers, are determined by the secondary market, in which investors buy mortgages or mortgage-backed securities. But Treasury Secretary Henry Paulson views lowering mortgage rates as key to fixing the housing crisis; hence the mortgage-security-buying program announced last week.

"The most important thing we can do to mitigate foreclosures and progress through the housing correction," Mr. Paulson said in a speech Monday, "is to reduce the cost of mortgage finance, so more families can afford to buy a home and so homeowners can refinance into more affordable mortgages."

Fannie, Freddie, their regulator and the Department of Housing and Urban Development -- which oversees the FHA -- all declined to comment. "The Secretary has said repeatedly that we are looking at a number of options to help homeowners," said Treasury Spokeswoman Jennifer Zuccarelli.

The Refinancing Picture

On the refinancing front, the Mortgage Bankers Association said its index of refinance applications had tripled from the previous week, the largest increase since it began tracking such data in 1990. Applications to buy homes, which tend to be less sensitive to interest-rate movements, also increased, by a smaller amount.

Application volume remains lower than it was as recently as March. Last week's numbers are adjusted for a shortened holiday week, which can make comparisons more difficult.

The Treasury plan is similar to ideas previously floated by the National Association of Realtors and the lobby group for home builders, but has skeptics. "I don't think it's the answer to the foreclosure problem because that problem is a combination of negative equity with unemployment," said Mark Zandi, chief economist of Moody's Economy.com.
Mr. Paulson has been wrestling for months with ways to stem foreclosures. The Bush administration has supported mostly voluntary efforts to get the mortgage industry to help borrowers in danger of losing their homes and has resisted calls to use taxpayer money to bail out homeowners. Those voluntary efforts have had only a limited impact as home prices continue to fall and foreclosures to rise.

The administration has been split about its approach, with Federal Deposit Insurance Corp. Chairman Sheila Bair floating a proposal to use $24 billion from the government's $700 billion financial rescue fund to provide a federal guarantee on roughly two million modified mortgages.

Her plan was a hit with Democrats and some Republicans on Capitol Hill but fell flat with the White House, where some speculated the FDIC plan could cost $70 billion to $80 billion. Mr. Paulson has expressed reservations about the plan on the ground that it would spend taxpayer money, instead of investing it, and that it could encourage banks to foreclose and borrowers to halt payments. Treasury staff have been working on a plan to improve Ms. Bair's model, but Mr. Paulson has so far resisted implementing it over concerns that it costs too much and might not be all that effective.

Resolving the crisis is likely to fall to Mr. Obama. He reiterated his position on Wednesday, saying, "We've got to start helping homeowners in a serious way, prevent foreclosures." Some Treasury officials are frustrated that the Obama team has not provided more specifics about what it would like the Treasury to do to help homeowners.

—Robin Sidel, Ruth Simon and James R. Hagerty contributed to this article.

Plummeting Interest Rates Set Off A Rush To Refinance

Immediately after the Federal Reserve announced that it would buy $600 billion of mortgage bonds, the mortgage rate dropped dramatically. Our phone has been ringing off the hook. If you had been waiting for rates to drop to refinance your high interest mortgage, the future is now!! For potential homebuyers, the house you wanted to purchase a few years ago but was too expensive, might be within your means with these new low rates and falling home prices.


Happy Thanksgiving!

Today’s Rates

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30-Year Fixed: 5. 500% (5.694% apr) 6.500% (6.785 apr)*

15-Year Fixed: 5.375% (5.475% apr)

All Rates Quoted at 0 points!

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 Take cash out of your home for debt consolidation, remodeling or college.



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• Jumbo loan from $417,000 up to $3,000,000. Super Jumbo loan (650K+ requires 25% down payment)
• Rates quoted as of November 28, 08 based on 20% down and credit score of 720, primary residence.

"Underwater" Need Not Mean Foreclosure

Why Most People Who Owe More Than a Property's Worth Will Still Keep Their Homes
By KAREN BLUMENTHAL

What does being "underwater" in your house really mean? Probably not that you're drowning.
The number of underwater homeowners -- those who owe more on their mortgages than their home is now worth -- has been growing sharply since 2006 as real-estate prices have tumbled. By some estimates, between one in six and one in eight homeowners are in that position, most of them people who bought homes in the past few years or who put down small or no down payments.
This worries economists and policy makers, since owing more than your home is worth is the first step toward foreclosure. And it's a concern to the rest of us because foreclosures are roiling the financial markets and, closer to home, they drag down our neighborhoods. (Most people who still have equity, by contrast, would rather sell their houses at a loss than lose what's left of their investment.)
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In response to concerns about rising foreclosure and delinquency rates, federal regulators are studying possible new programs aimed at needy homeowners. There are concerns that such programs could attract a flood of applications from those who don't truly need assistance or encourage lenders to push homeowners into foreclosure. At the same time, lenders such as J.P. Morgan Chase and Bank of America have committed to working on new loan terms for the most-distressed homeowners.
But experts who have studied previous sharp housing downturns in Texas, California, New York and Massachusetts say that being underwater, while unpleasant, doesn't lead huge numbers of homeowners to default on their mortgages and end up in foreclosure.
Christopher L. Foote, Kristopher Gerardi and Paul S. Willen of the Boston Federal Reserve Bank studied more than 100,000 homeowners who were underwater in Massachusetts in 1991 and found that just 6.4% of them lost their homes to foreclosure over the next three years, according to a paper published in the September Journal of Urban Economics. The vast majority of homeowners simply continued paying as usual because they focused on the affordability of their payments, not on what they owed, and they believed home values would eventually recover.

The economists found that homeowners typically lost their homes only after at least two things happened: Their home values dropped and they either couldn't afford the payments or stopped making payments after losing hope that prices would eventually recover.
Homeowners in California also were more likely than expected to keep paying during the deep 1990s slump, says Richard Green, director of the Lusk Center for Real Estate at the University of Southern California. More people turned in their keys in Ohio and Michigan during the difficult 1980s downturn because they lost faith in an economic turnaround.
Typically, homeowners fall behind after a job loss, divorce or serious illness. In the current downturn, foreclosures are higher than in previous cycles because more homeowners reached beyond their means to buy their homes and simply can't keep up the payments. As a result, the Boston economists project that up to 8% of underwater Massachusetts homeowners could lose their homes between now and 2010 -- a significant amount, but still not catastrophic.
So what does this all mean for you?
If you have a low-interest fixed-rate loan, you have a valuable asset that might be hard to replace in the current market, no matter what your home's value is. Keeping that mortgage current has some value, even if it means cutting other household expenses.
In addition, the penalties for defaulting are great. In most cases, walking away from a mortgage can knock a top credit score down to the cellar, says Ethan Dornhelm, a senior scientist at Fair Isaac Corp., which sells credit-scoring formulas to credit bureaus.
A person with a stellar credit score from the high 700s to the top score of 850 would see it drop more than 200 points. A person whose credit score is lower may see it fall by fewer points, but still end up with a score in the mid 500s. At that level, reasonably priced new debt, from credit cards to car loans, will be out of reach. In addition, a default could lead landlords and utilities to require more cash up front and even affect your job prospects.
If the borrower continues to pay other debts on time, the score will climb gradually, though it may take three to five years to return to "good" scores, from the mid-600s and up. Scores of 790 or more -- which are rewarded with the lowest interest rates -- won't be attainable for at least seven years, when the default blemish finally disappears, Mr. Dornhelm says.
Fannie Mae requires borrowers who have lost their homes to foreclosure to wait five years before it will accept a loan from them, though borrowers who had extenuating circumstances, such as an illness or job loss, may requalify within three years.
What's more, lenders in most states can go after homeowners for an unpaid balance on a mortgage. That's a real risk, especially if you have other assets.
The longer you stay in your house, the better the chances of making it through this down cycle. Though a return to peak prices may take five or 10 years, some housing markets may start to bounce back once credit becomes more available. Meanwhile, you'll be reducing your mortgage as you make your payments.
Lenders aren't going to renegotiate just because prices have fallen, but if you truly can't afford your payments, contact your mortgage servicer to see if you can rework your interest rate or work out new payment options. The federal Hope for Homeowners program, which began Oct. 1, is intended to provide some relief if lenders will agree to reduce the loan amount to 90% of the home's current value.
If you can't get help from your lender, try contacting a credit counselor certified by the Department of Housing and Urban Development. These counselors have direct access to lenders' loss-mitigation departments, which consumers don't, says Natalie Lohrenz, counseling administrator for Consumer Credit Counseling Service of Orange County, Calif. A list of HUD-certified counselors is available through Hope Now, a consortium of lenders and counselors. (Call 888-995-HOPE or go to www.hopenow.com.)
If you need to sell the property and can't afford to cover the shortfall, your lender may agree to a "short sale," in which you sell at a price below the mortgage amount. This is a much more complicated transaction to pull off than a regular home sale, though, and it may hurt your credit score if the lender reports that you failed to pay off the whole obligation.

Gov't launches mortgage aid program

New mortgage help program launched by government as foreclosure crisis continues

WASHINGTON (AP) -- The government kicked off a program Wednesday that aims to prevent foreclosures by letting an estimated 400,000 troubled homeowners swap their mortgages for more affordable loans.

Lenders, rather than borrowers, will decide whether to participate in the program, which requires them to take a loss on the initial loan. The $300 billion, three-year program is designed to help borrowers who owe more on their loans than their homes are worth.

To qualify, borrowers must be spending more than 31 percent of their income on mortgage payments. Loans made this year are excluded, except for those completed on Jan 1. Borrowers must have made six months of payments on their loans.

"For homeowners in trouble, this may be the help that they need," Housing and Urban Development Secretary Steve Preston said Wednesday. Officials did not have an updated estimate of how many homeowners were likely to qualify, beyond the Congressional Budget Office's projection from earlier this year that 400,000 borrowers would participate.

The program, dubbed 'Hope for Homeowners,' was passed by Congress this summer as part of a massive housing bill. It is one of several government efforts to stem the mortgage crisis.

Critics, however, call the government's actions sluggish and inadequate. Earlier action to modify loans, they say, might have prevented a $700 billion financial industry bailout now being debated in Washington.

Executives from Citigroup, JPMorgan Chase, Bank of America and Wells Fargo told lawmakers last month they have been hiring additional workers to put the new program in place.

Still, it is unclear whether the industry will embrace the plan fully. One concern is that investors in mortgage securities must take an immediate loss and can't recoup their lost money if home prices turn upward again.

Investors would rather modify loans in ways that maintain the ability to "share in future appreciation," JPMorgan Chase executive Marguerite Sheehan said in written testimony submitted to House lawmakers last month.

On Monday, a group of state banking and law enforcement officials released a report that said nearly 80 percent of borrowers with subprime loans were not on track for assistance to avoid foreclosure as of May.

The report by the State Foreclosure Prevention Working Group criticized the lending industry for making only small changes to loan terms and noted that about one in five loans that were modified over the past year became delinquent again.

"While banks and Wall Street firms continue to report record write-downs of mortgage loan portfolios and securities, the losses do not appear to be flowing down to homeowners in the form of sustainable loan modifications," Iowa Attorney General Tom Miller, a founder of the state effort, said in a statement.

What Happens to Your Benefits After Bankruptcy

Marlene Skulnik worked on Wall Street for 25 years, most recently for Lehman Brothers Holdings Inc. After the investment bank filed for bankruptcy last week, the retired corporate-bond trader had trouble getting a straight answer on whether her pension benefits were safe.

"I would like to have a confirmation that I'm not going to be a housekeeper in a motel in my 70s," says the 57-year-old Ms. Skulnik, who began her career as a secretary in 1975.

As Ms. Skulnik and thousands of other Lehman employees and retirees discovered, it can be difficult getting specific answers to questions about the fate of key corporate benefit plans -- such as traditional pensions, 401(k)s and health insurance -- in the first days after a company goes bust. Even top executives struggle to see where the dust settles. As the financial crisis threatens to consume more companies, it's an increasing concern.

Ms. Skulnik says she was eventually assured by the pension plan's administrator, Fidelity Investments, that her benefits should be safe. Indeed, retirement benefits such as pensions and 401(k) plans are generally protected under federal law in the event a company declares bankruptcy.

It's a far different story for health benefits. Whether your coverage will survive depends in part on whether the company liquidates -- a so-called Chapter 7 bankruptcy -- or continues operating under Chapter 11 reorganization.

Here's what to consider if your company is facing the possibility of bankruptcy:

Retirement plans. The Pension Benefit Guaranty Corp. -- a federal agency created under the Employment Retirement Income Security Act, or Erisa -- guarantees your pension payments, but only up to a maximum amount, which means you might have to take a cut. For pension plans canceled in 2008, the maximum monthly guaranteed payment for a 65-year-old retiree receiving regular payments with no survivor benefits is $4,312.50. The PBGC doesn't insure assets in 401(k) plans. But Erisa requires pension and 401(k) accounts to be adequately funded and kept separate from the company's business assets.

While retirement-plan assets generally won't be swallowed up when a company fails, you could still face losses. If too much of your nest egg is invested in company stock, its value will plunge along with the company's shares ahead of a bankruptcy filing.

Health-care plans. If your company files for Chapter 7 bankruptcy, your health coverage likely will disappear, leaving you few options to explore besides getting on a spouse's plan or paying for expensive individual coverage.

Under Chapter 11 restructuring, your health coverage could stay unchanged as the company reorganizes. Companies in this situation, in fact, will often continue offering benefits to forestall a mass exodus of employees. When Delta Air Lines Inc. filed for Chapter 11 protection in 2005, for example, it continued providing health-care coverage and even vacation days without interruption.

If you employer's health plan continues, but you ultimately lose your job, you could be eligible for continued coverage under the Consolidated Omnibus Budget Reconciliation Act, or Cobra. Under this law, you can buy coverage for up to 18 months if you've been laid off, assuming your company has more than 20 employees.

The catch: You have to pay the entire premium, making the coverage far more expensive. According to a Kaiser Family Foundation study, former employees last year paid an average of $373 a month for individual coverage and $1,009 a month for family coverage, plus a 2% administration fee.

Associated Press/Bebeto Matthews

If a company eliminates your health-care plan, for any reason, all bets could be off -- including Cobra coverage. "Part of the reason for reorganization [is] precisely to allow the cancellation of these types of obligations," says Phillip Phan, a management professor at Johns Hopkins University's Carey Business School.

What to do. While labor laws govern employee benefits, it remains incumbent on workers to arm themselves with information about their health and retirement plans when a company fails, experts say. "I think the most important thing is to make inquiries," says Mark Poerio, cochair of the global practice group for employee benefits at law firm Paul, Hastings, Janofsky & Walker LLP. Federal law "requires honest responses of employers. It punishes misrepresentations."

If your company files for bankruptcy, the U.S. Department of Labor suggests asking human-resources or other management officials these questions: Will your retirement and health-care plans continue or be terminated? Who will be the plans' administrators during and after bankruptcy, and, in the case of a retirement plan, who will be the trustee in charge? Will Cobra coverage be offered to those who lose their jobs? And if a health plan is canceled, how will outstanding claims be paid?

In order to protect yourself, the Labor Department also suggests asking for a "summary plan description" of your retirement and health-care plans; statements that establish employment dates, compensation and contributions to your plans; and a certificate of creditable coverage that states your past health-care coverage with your employer. The information in these documents can educate you on the particulars of your plans, so you know what to expect if they're terminated.

If you're unable to obtain these documents -- or are concerned about suspicious activity related to contributions or investments -- you can contact the nearest office of the Employee Benefits Security Administration, the Labor Department agency that enforces Erisa rules (www.dol.gov/ebsa).

If you suspect your company is in danger of failing, you should start preparing for it. Joanna Wilson, a former financial analyst at Delphi Corp., a Troy, Mich.-based auto-parts supplier, did just that before her employer declared bankruptcy in 2005.

Delphi, suffering amid a brutal downturn in the domestic auto industry, had begun cutting workers and postponing raises. They also started increasing health-care premiums. "The writing was on the wall," says Ms. Wilson. "People were jumping ship left and right."

Ms. Wilson decided to switch to the health plan at her husband's law firm. That plan was more expensive and wasn't as generous as Delphi's in its heyday, she says. But the move safeguarded her care and, as Delphi kept raising premiums, the couple decided it made financial sense. She also consulted a financial adviser about rolling over her 401(k) to an individual retirement account, which she did when she left the company soon after it filed for Chapter 11.

Bailout Negotiations Enter Evening Session

WASHINGTON -- The idea of charging large financial firms fees to set up an industry-funded rescue insurance fund was gaining momentum as key House and Senate negotiators continued to meet Saturday evening to iron out the final details of a $700 billion rescue package for Wall Street.

Lawmakers and staff reconvened their meeting around 7:30 p.m. EDT in the offices of House Speaker Nancy Pelosi (D., Calif.), hopeful they could broker a deal on the much anticipated but exceedingly difficult-to-negotiate legislation that would have the federal government buy up billions of dollars of soured assets.

Associated Press

Sen. Charles Schumer, left, Sen. Max Baucus and Sen. Jack Reed take a short break during ongoing negotiations on Capitol Hill Saturday.

The mood was said to be "optimistic" entering the evening talks, according to a Senate aide familiar with the talks, after policymakers -- including Treasury Secretary Henry Paulson -- made progress during an afternoon negotiating session. Staff predicted a long night of negotiations, however, an observation backed up by the delivery of food from sandwich shop Cosi to Ms. Pelosi's office just before 8 p.m. EDT.

Congressional negotiators have been consulting with outside experts including billionaire investor Warren Buffett amid a focus on market reaction to the plan.

"We've had Warren Buffett on the phone tonight, other experts that we've been consulting," Sen. Kent Conrad (D., N.D.) told reporters as he walked through the U.S. Capitol. He declined to identify other people with whom lawmakers have consulted.

Senate Majority Leader Harry Reid (D., Nev.), in an appearance on the Senate floor earlier Saturday, said there are only a "handful of issues still lingering" for lawmakers to finalize. He said his goal was for the Congress and the Bush administration to at the very least release an outline of the bailout plan before Asian markets open Sunday evening.

The Senate aide said a number of specific ideas appeared to be gaining traction Saturday evening, most notably the concept of creating a "financial stability" fund financed by Wall Street and styled in the mold of the deposit insurance program run by the Federal Deposit Insurance Corp. Lawmakers had considered levying a tax on some securities transactions to help offset the cost of the $700 billion rescue plan, but the idea of assessing fees on a wide swath of financial firms to help pay for current and future government bailouts had its proponents.

The aide said specific language was still being worked out, but that negotiators were deliberating whether to assess the fees on all types of financial firms -- including possibly hedge funds and other nontraditional institutions -- and whether to put the fund in place now or in the future depending on the eventual cost to taxpayers from the current rescue plan. The fees and the fund would likely only apply to larger firms over a certain asset size.

A draft of the financial stability fund language suggest it would apply to financial firms, "the failure of which would result in direct pecuniary losses to the Federal Government, due to reliance upon Federal loans, advances, or other provisions of financial instruments or securities."

Associated Press

Senate Republican Leader Mitch McConnell and Sen. Judd Gregg speak on the financial crisis Saturday.

Also gaining steam was a proposal to eliminate the tax deductions for companies on executive compensation for top officers that is above $400,000. Eliminating so-called "golden parachutes" and excessive executive pay-outs for firms that sell toxic assets to the government has been a key issue for lawmakers on both sides of the aisle in their deliberations with the Treasury Department.

Lawmakers were also said to be making headway on their insistence that the government receive mandatory warrants in firms that sell directly or auction their bad assets to the government.

"We're just shopping language right now and it's going back to have some lawyers look at the latest offer," said Mr. Conrad (D., N.D.), the chair of the Senate Budget Committee, as he was heading back into the evening session.

One issue still to be resolved was how the $700 billion authority to Treasury to buy up toxic assets will be meted out.

Lawmakers want Treasury to receive the authority in tranches, receiving $250 billion immediately and another $100 billion if needed as certified by the president. The remaining $350 billion would be subject to a Congressional vote, giving lawmakers the opportunity to vote to rescind the funds.

But a Senate aide familiar with the discussions said Treasury is pushing for a larger initial authority, likely around $500 billion.

Lawmakers appeared to have the advantage on the issue ahead of the evening talks, the Senate aide said, though no part of the deal had been completely finalized.

Congressional and Treasury staff members have been trying to resolve the various issues related to the Wall Street bailout plan all week, and staff discussions lasted all day Friday and extended into the wee hours of Saturday morning to no avail.

Rep. Roy Blunt (R., Mo.), one of the negotiators, said that progress was being made but he wouldn't discuss specifics.

The bailout negotiations took a step forward Friday, when Senate Democrats agreed to include an insurance-based scheme as an option as part of the Wall Street bailout package in a bid to win support of House Republicans, who have been the main obstacle to reaching an agreement.

Sen. Charles Schumer (D., N.Y.) said that while Democrats would allow the insurance idea to be included, he didn't think that any financial firms would choose to take part in such a scheme. "I offered on behalf of Sens. (Christopher) Dodd and Reid that we would put their proposal in as an option," said Mr. Schumer. "No one would have to use it, but it would be there as an option."

According to lawmakers on both sides of the aisle, the plan proposed by Mr. Paulson, which would see the federal government buy up to $700 billion in toxic mortgage-linked assets, will form the core of any solution.

Sen. Judd Gregg (R., N.H.), one of the lawmakers taking part in the talks to thrash out an agreement, said Saturday morning that the negotiators would stay in the meeting until an agreement is reached. "The basic understanding is once we get into that room we are going to stay there until we have an agreement," he said.

Senate Minority Leader Mitch McConnell (R., Ky.) said he hoped that if a deal could be reached Sunday, then lawmakers could vote on it Monday.

Initially there were to be four lawmakers -- one representing each party in both houses of Congress at the talks. They were Messrs. Gregg and Dodd in the Senate and Reps. Barney Frank (D., Mass.) and Blunt in the House. Mr. Frank is the chairman of the House Financial Services Committee, Mr. Blunt is the Minority Whip, while Mr. Dodd is the chairman of the Senate Banking Committee hearing, and Mr. Gregg is the ranking member on the Senate budget panel.

But they were joined by several other senior Democrats, and there are as of late Saturday nine Democrats in the room compared with just the two Congressional Republicans, and Paulson.

After an apparent agreement was announced by lawmakers Thursday, House Republicans threw a wrench into the process by saying they would not support the deal, proposing instead their own alternative plan.

That plan would be based around the idea of an industry-funded insurance pool to provide certainty to the markets, rather than a taxpayer-funded scheme.

Mr. Conrad, the chairman of the Senate Budget Committee, said the insurance proposal had come up earlier in the negotiations, but that Treasury and the Federal Reserve rejected it.

Mr. Schumer said it could end up bankrupting firms, given the premiums would be so high.

House Republicans appeared to be conceding the point that the insurance scheme wouldn't replace the asset purchase plan as they had previously insisted.

The Republicans' priority is "making sure there is an insurance program in there in the tool kit of the secretary," said Rep. Adam Putnam of Florida, the chairman of the Republican House Conference.