Treasury eyeing multiple options on housing

CHICAGO (Reuters) - Lowering mortgage rates through a program relying on Fannie Mae and Freddie Mac is just one of several options the Treasury is considering to support housing, a senior Treasury official said on Thursday.

"We want to use every tool in the federal government's arsenal," Neel Kashkari, the official in charge of the Treasury's financial rescue efforts, told a congressional field hearing.

The Treasury is mulling steps to steady the bruised U.S. housing market by possibly offering 30-year mortgages at a fixed rate of 4.5 percent, about a full percentage point below their current level, through Fannie Mae (FNM.P) and Freddie Mac (FRE.P), sources said on Wednesday.

A source familiar with Treasury's thinking described consideration of the plan as very preliminary.

Kashkari said any program relying on Fannie Mae and Freddie Mac, which own or guarantee roughly half of the $12 trillion in U.S. mortgage debt, would be separate from programs Treasury was considering to stem a rising tide of foreclosures under a $700 billion financial rescue program.

"We continue to aggressively examine strategies to mitigate foreclosures and maximize loan modifications," he told a Senate panel. Kashkari, who offered few details, also said the Treasury was considering new steps to strengthen bank capital.

So far, the Treasury has tapped about half of the congressionally approved financial rescue fund. With the first tranche running out, the administration is weighing whether to ask Congress for the rest of the money.

"Do you need more dry powder? Does the market need more action? The jury is still out," Keith Hennessey, the director of the White House National Economic Council, told CNBC television.

Kashkari reiterated that the Treasury wanted to "maintain flexibility and firepower" for this administration and the next one as it thinks about new uses of funds under the program.

FEELING THE HEAT

The Bush administration has been under pressure from U.S. lawmakers to use the bailout fund to help homeowners facing foreclosure, with many endorsing a plan from the Federal Deposit Insurance Corp.

In testimony to the same panel, a senior FDIC official urged more aggressive action to help strapped homeowners. "A major acceleration in loan modifications is essential if we are to stem the growing flood of foreclosures," said Michael Krimminger, an adviser to FDIC Chairman Sheila Bair.

Under the FDIC proposal, the government would seek to encourage lenders to modify loans by offering to share the cost of any defaults. The FDIC has said its proposal could prevent about 1.5 million foreclosures.

Treasury Secretary Henry Paulson has said the FDIC program would be a misuse of rescue funds, arguing they are meant for investments not government subsidies. So far, the Treasury has focused on injecting capital into banks by purchasing equity.

Krimminger said supplying funding to financial institutions will not be enough by itself to restore lending and stabilize housing and financial markets. "We must address the root cause of the financial crisis -- too many unaffordable mortgages creating too many delinquencies and foreclosures," he said.

Speaking at a conference in Washington, Federal Reserve Chairman Ben Bernanke also said more needed to be done to halt foreclosures.

"Despite good-faith efforts by both the private and public sectors, the foreclosure rate remains too high, with adverse consequences for both those directly involved and for the broader economy," he said.

Bernanke said loan principal would likely need to be written down to make loans more affordable and keep people in their homes. He also said a program aimed at spurring loan modifications run by the Federal Housing Administration could be more effective if the Treasury drove down mortgage rates by buying securities issued to fund the program.

(Additional reporting by Mark Felsenthal, John Poirier and Patrick Rucker in Washington; Editing by Kenneth Barry)