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* White House anxious for settlement with servicers
* Gov't has set aside $1.52 bln to help reduce home loans
* Nearly quarter of U.S. homeowners are under water
* Republicans likely to block costly remedies
By Rachelle Younglai
WASHINGTON, June 7 (Reuters) - The Obama administration has grown increasingly frustrated with the country's struggling housing sector and is exploring ways to keep it from weakening further, two sources familiar with the administration's thinking said.
The White House has already set aside nearly $50 billion in taxpayer funds to help distressed homeowners keep their homes and stem the flow of foreclosures.
But with a surplus of homes for sale, declining home prices, little demand and high unemployment, the efforts have foundered and only a small portion of available funds has been put to use.
There is no obvious solution to the country's housing woes. The administration could try to address the problem by tweaking existing foreclosure prevention programs, introducing another tax credit for first-time homebuyers or taking steps to ensure the government can continue to guarantee bigger mortgages.
But with Republicans controlling the House of Representatives, any solutions that would require a significant amount of new money are unlikely to gain much traction.
More than 3.5 million homes have been foreclosed on since the beginning of 2007, when the housing market entered its freefall, according to real estate data firm RealtyTrac.
Home prices in March slumped to lows not seen since March 2003, and 10.9 million, or 22.7 percent, of homeowners are under water, meaning they owe more than their home is worth.
For months, the Obama administration has been throwing money at the housing sector and pondering other measures. But the recent bout of dreary economic data has prompted a new look at potential fixes, the sources said.
The sources requested anonymity because the talks are private and no decisions on new steps have been taken.
"It is imperative that the administration look hard at whether there is more they can do to jump-start the housing market and deal with the overhang of foreclosed properties and underwater borrowers," said Sarah Wartell, executive vice president with a progressive think tank, the Center for American Progress.
One of the biggest barriers to the housing recovery is that nearly one-quarter of all homeowners owe more than their homes are worth, and many will likely default on loan payments and lose their homes.
"You are not going to get housing moving through the country unless you solve the foreclosure program," said Ira Rheingold, executive director with the non-profit consumer group, the National Association of Consumer Advocates.
The administration has been anxiously waiting for states, federal authorities and the biggest housing lenders to reach a settlement over mortgage servicing problems, including cases in which foreclosure documents were rubber-stamped, or handled without following proper procedures.
It is seen as one way to extract financial penalties from the mortgage companies that could then be used to help cut the amount Americans owe on their troubled mortgages.
"Principal reduction is really important. That is probably where we have the greatest margin in making a difference," said Jared Bernstein, who until recently served as an economic adviser to Vice President Joe Biden.
With billions already set aside from the U.S. Treasury's bank bailout fund to help homeowners, the likelihood of infusion of federal dollars is slim.
Federal and state officials are seeking billions of dollars from Bank of America (BAC.N), JPMorgan Chase (JPM.N), Citigroup (C.N), Wells Fargo (WFC.N) and Ally Financial to help with principal write-downs.
Under one of the administration's foreclosure prevention programs, the hardest-hit states will be allowed to use $1.52 billion to reduce mortgage principal, an amount analysts say is far too small to have much impact.
The bulk of the taxpayer funds has been set aside for the government's main housing rescue program, which aims to permanently modify loans. But the program has been widely criticized as ineffective. Only $1.85 billion has been put to use so far.
When it was launched, the administration said it expected 3 million to 4 million homeowners to benefit from the program. To date, only 670,000 homeowners have won lower payments. (Additional reporting by Leah Schnurr in New York; Editing by Dan Grebler)