And millions of homeowners, one at a time, now may play a key role in preventing the crisis from becoming a collapse if they can get help making payments and saving their homes, as did Tania Harrigan of South Philadelphia last week.

"I really want to be able to keep my house," said Harrigan, 53, who came through Philadelphia's foreclosure program still holding her title and committed to making lower monthly payments. "I don't want to be on the street."

Harrigan personifies the next challenge for government officials in the financial crisis. If homeowners continue to lose their homes and turn even risky loans into total defaults, any rescue plan is less likely to succeed. Helping these homeowners would boost the housing market by keeping borrowers in their homes.

Consumer advocates and a handful of officials, including U.S. Sen. Robert P. Casey Jr. (D., Pa.), pushed Congress in vain to include a national foreclosure arbitration process - perhaps like the Philadelphia program that saved Harrigan - in the banking bailout plan.

The $700 billion bailout "simply will not work to stabilize the economy if it does not address the underlying problem of home foreclosures and falling home prices," said Martin Eakes, chief executive of the Center for Responsible Lending, a nonprofit in Durham, N.C.

Housing advocates considered the bailout - the most significant federal intervention in the economy since the Great Depression - a golden opportunity to develop a federal program that would get the mortgage industry to systematically modify poorly designed loans to make them affordable.

"The underlying problem with the housing market right now is the foreclosure issue," said Celia Chen, director of housing economics at Moody's Economy.com in West Chester.

Foreclosures are "adding to already loaded inventories of homes for sale. That keeps home prices from stabilizing," she said.

Chen said the most recent U.S. Census Bureau data showed that there were 2.25 million vacant housing units available, compared with the usual level around 1.5 million.

Policymakers have taken some steps on foreclosures, Chen said, but "they are just chipping away at a really big problem."

About 1.5 million mortgages entered foreclosure last year, followed by 1.2 million in the first half of this year, Sheila C. Bair, chairman of the Federal Deposit Insurance Corp. (FDIC), told the House of Representatives Financial Services Committee this month.

Some homeowners fell behind on payments simply because of money problems from causes such as losing a job. Many people holding adjustable-rate loans got nailed by soaring payments. And some found their homes plummeted in value, even below the mortgage amount they owe.

Bair said sales of foreclosed houses accounted for an estimated 45 percent of house sales in California in July, up from 7.6 percent a year ago. Those distressed sales put tremendous downward pressure on prices overall.

The foreclosure problem in the Philadelphia region is not nearly as big as in parts of California, but it plays a role in the sluggish market.

Bruce Dorpalen, the Philadelphia-based director of housing counseling for Acorn Housing Corp., said he hoped Congress would give the FDIC the job of modifying loans the federal government ends up owning.

Soon after taking over the failed IndyMac Federal Bank, the FDIC instituted a loan modification program for as many as 60,000 of 712,000 IndyMac loans.

Through mid-September, 7,400 modification proposals had been sent to borrowers, and 1,200 borrowers had accepted, with an average reduction in monthly payments of $430.

"We've certainly seen them do good deals on loans," said Dorpalen.

It is unlikely that the Treasury Department could unilaterally modify loans under the bailout proposal because it is likely to own slices of securities based on home mortgages, rather than loans themselves.

Consumer advocates want bankruptcy laws changed to allow judges to reduce the amount owed on a loan to the market value of the house. For example, a homeowner who owes $100,000 on a house valued at $50,000 might get a judge to lower the mortgage balance also to $50,000.

The financial services industry, which is eager for the federal government to start paying more for toxic debt than its current market value, is vehemently opposed to such a change.

The Philadelphia program has been working for people like Harrigan because it pauses the foreclosure process and forces lenders to negotiate with borrowers, said John Dodds, executive director of the Philadelphia Unemployment Project, which helped Harrigan through the process.

"We've been pretty amazed at how well it's been coming out," Dodd said.

There is no stereotypical participant in the program, said Common Pleas Court Judge Annette M. Rizzo, who is one of the leaders of Philadelphia's innovative foreclosure diversion program.

"It's a true cross-section. There are people who were on track with their mortgage and it just went awry" because of illness or injury, divorce or job loss.

Since starting in June, the city's Residential Mortgage Foreclosure Diversion Pilot Program has saved 230 properties from a sheriff's sale, according to a report from the Court of Common Pleas, which oversees it. Another 200 cases were postponed. Altogether, 1,019 cases were scheduled for a conference between borrowers and lenders.

Irv Ackelsberg, a consumer attorney and a veteran of the city's foreclosure battles, cautioned that the Philadelphia model cannot easily be replicated elsewhere because the city has achieved unique coordination among housing counselors, lawyers and judges.

On her own, Harrigan found it impossible to deal with her mortgage company. But under the city's program the lender agreed to reduce her interest rate to 9.5 percent from 11.75 percent. Her arrears were rolled into her principal, which means her payment only fell by $5, to $411 from $416.

The best thing for the financial system: She'll be able to keep making her payments. That, in turn, will help improve the performance of one of the mortgage-backed securities that has gummed up the financial system, if even very slightly.

For Harrigan, the benefit may be immeasurable: "I want someplace where we can live."

INSIDE

Bob Casey

on the legislative debate. A22.

Amid crisis, bickering. Analysis, A22.

On the Hill, negotiators work long hours. A23.

Fannie and Freddie and Bear. Chronology, A23.