Congress study: Housing aid wouldn't help economy

A ''for sale'' sign is seen in a vacant lot in the Courtland Ridge development in Alpine, Utah, March 26, 2008.

WASHINGTON (Reuters) - U.S. lawmakers' plans to aid troubled homeowners would likely help prevent many foreclosures but wouldn't stop the freefall in home prices or stabilize the economy, a congressional report said on Friday.

A plan from Democratic lawmakers would have the federal government buy up troubled loans once the loan amounts were reduced by the original lender.

"Such actions could help reduce the number of foreclosures... (but) would significantly shift the risk involved in mortgage losses from the current lenders and investors to taxpayers," said a report from the Congressional Budget Office, which gives nonpartisan research advise to lawmakers.

The plan sponsored by Sen. Christopher Dodd and Rep. Barney Frank, the top two lawmakers for financial matters, would let lenders dump mortgage investments on the federal government once they had erased some of the original loan amount.

The program would be run through the nation's largest homebuyer-assistance program, the Federal Housing Administration.

While the CBO report did not address the specifics of the Dodd/Frank plan, it mulled the potential risk and benefits of such an approach.

The report found that the plan "might break a downward spiral in which foreclosures put houses on the market, pushing down house prices."

Still, it warned that the plan would not be sweeping enough to restore the housing market or ailing economy.

"If the objective is to arrest the decline in house prices, however, the policies are less likely to succeed," the report finds.

The full report is available on the Congressional Budget Office Web site here

(Reporting by Patrick Rucker, Editing by Chizu Nomiyama)