CORRECTED - WRAPUP 2-U.S. launches mortgage plan as homeowners struggle

(Corrects to show House to take up housing bill on Thursday in paragraph 9)

* U.S. launches $75 billion mortgage modification plan

* Borrowers must show hardship to qualify for program

* Data show 1 in 5 homeowners owe more than house worth

By David Lawder and Lynn Adler

WASHINGTON/NEW YORK, March 4 (Reuters) - The Obama administration on Wednesday launched a $75 billion foreclosure relief plan, as new data showed one in five U.S. homeowners with mortgages owe more than their house is worth.

The mortgage plan, part of a $275 billion housing stimulus program announced last month, enables struggling homeowners to modify loans even if they are "under water."

Homeowners with mortgages on about 8.3 million properties were under water at the end of 2008 and the distress is likely to grow as home values shrink, according to First American CoreLogic.

Being under water, or having negative equity, has previously ruled out refinancing. This new government step aims to reduce payments and prevent looming foreclosures for struggling borrowers and allow standard refinancings for stronger borrowers whose homes values have eroded.

The U.S. Treasury Department unveiled eligibility guidelines for the mortgage modification program that aims to target relief to people facing imminent hardship.

In issuing the guidelines, the Treasury opened the door to borrowers who are delinquent in their payments or at risk of falling behind to begin pressing for loan modifications.

The program, which offers cash incentives to loan servicers to cut monthly payments, will only modify mortgages on single dwellings up to $729,750 originated before Jan. 1, 2009, with higher limits for multiple-unit owner-occupied properties.

Homeowners who stay current on modified loans will see their principal reduced by up to $5,000 and lenders will get additional incentives for extinguishing second-lien home equity loans.

Details of the program were announced ahead of an expected vote in the U.S. House of Representatives on Thursday on a bill that would let federal judges erase mortgage debt for homeowners who enter bankruptcy as a last resort. The bill, which also would shield firms that ease loan terms from investor lawsuits, is expected to be approved.

STEMMING A DEEP HOUSING SLIDE

U.S. home prices have swooned by more than 26 percent since peaking in mid-2006, based on Standard & Poor's/Case-Shiller indexes, and are widely seen sliding further.