Obama eyes home loan subsidies in rescue plan-sources

Sources said Fannie Mae and Freddie Mac would play a supporting role in the new plan, but said the two companies are not expected to repackage the reworked loans as securities for investors, a main line of their business.

OTHER PLANS DISCARDED

Homeowners would have to make a case of hardship to qualify for new loan terms, according to the sources.

Officials weighed, but have shelved for now, another plan that would have the government stand behind low-cost mortgages of between 4.0 percent and 4.5 percent, the sources said.

Howard Glaser, a housing official in the Clinton administration, said the type of program under discussion would give officials more "bang for the buck" than the government would get by guaranteeing troubled loans.

"Federal purchase or guarantee of these same distressed mortgages would be vastly and prohibitively expensive," he said.

Subsidizing existing mortgages would have the added benefit of using the mortgage companies' existing infrastructure, rather than creating a new bureaucracy.

Lockhart said policy-makers are eager to prevent a large drop in home values from their current, deflated levels.

"Just as we had a large overshooting to the upside. Is there any way to prevent going much further to the downside? That will cause tremendous harm to the U.S. economy, to the financial system and it's not necessary," he said.