The Bush Administration is considering a plan that could keep as many as 3 million homeowners who are behind on their mortgages from losing their houses, The New York Times reported today (Thursday).

According to the newspaper report, this program would be the most sweeping and direct government initiative aimed at home-loan borrowers since the financial crisis started last year. As proposed, the federal government would incur half the loss on a home loan if the mortgage company that controls the loan agrees to lower the borrower’s monthly payment for at least five years. On any given loan, the mortgage company would reduce the payment borne by the homeowner by writing off part of the loan balance, reducing the loan’s interest rate or changing other loan terms, sources told The Times.

The newspaper said it could not name the three senior officials who provided details of the plan because it was still being worked out.

The plan – which would be part of the $700 billion banking-system rescue plan the government approved early this month – would cost $40 billion to $50 billion, with the money being used to cover future losses on loans that are deemed eligible for federal support.

U.S. Treasury Department and Federal Deposit Insurance Corp. (FDIC) officials are collaborating on the proposal and an announcement may be made sometime soon. FDIC Chairwoman Sheila C. Bair – a leading proponent of such a plan – publicly discussed the possibility a week ago.

Bush Administration officials clearly want to stabilize the U.S. housing market, but that’s easier said than done. Even at a time when roughly one in every 10 mortgages was either delinquent or in foreclosure – as was the case this summer – companies have been highly reluctant to aggressively reduce payments for two key reasons:

• They’re afraid the borrowers might default again.
• And they fear that the buyers of mortgage-backed securities might sue.

By offering to incur half the losses, federal officials hope that the U.S. housing market – and the accompanying market for mortgage loans – might finally settle out, which could also ease the financial crisis even as it provides a bit of a boost to the U.S. economy.

There’s one key challenge, however: If the economic slump ultimately ends up being deeper and longer-lasting than anyone right now predicts, the housing program could end up being much more expensive than planned – dumping still more unexpected debt onto the U.S. balance sheet.

Treasury Department spokeswoman Jennifer Zuccarelli told The Times that it would be premature to discuss a plan that policymakers were still working on.

“As we said last week, the administration is going through the White House policy process to look at ways to reduce foreclosures, and that process is ongoing,” she told the newspaper. “We have not decided on a particular approach.”

Source: Bush Administration Proposing Plan to Bail Out Delinquent Homeowners