U.S. mulls up to $600 billion in home loan guarantees

WASHINGTON (Reuters) - U.S. regulators are working on a new federal program that could provide government guarantees for up to $600 billion of home mortgages to help prevent foreclosures, a source familiar with the discussions told Reuters on Wednesday.

The plan, being hammered out by the Federal Deposit Insurance Corp and the U.S. Treasury Department, could provide guarantees for up to 3 million at-risk mortgages, said the source, who spoke on condition of anonymity because the program is still being discussed.

The Treasury Department said on Wednesday that it is working with the FDIC and other policymakers on foreclosure-prevention measures but that no detailed plan has been reached.

“We are working with the White House and through the policy process on a range of foreclosure-prevention options,” said Treasury spokeswoman Jennifer Zuccarelli, adding that the Treasury has not decided on a particular approach.

The White House also said no decisions have been made. “We’re always reviewing proposals to help homeowners,” said White House spokesman Tony Fratto.

The plan would provide federal guarantees to entice lenders to ease the terms of troubled mortgages -- something that lenders have been reluctant to do on a large scale so far.

The expected cost to the government would be a fraction of the value of the guarantees, as the intent of the program is to prevent defaults on home loans.

FDIC spokesman Andrew Gray said the agency has had productive conversations with Treasury about the proposal, but it would be premature to speculate on the parameters or details of a program.

The source said the government is aiming to announce the program in coming days.

The program would be managed by the FDIC and would be available to banks, savings and loans, investment funds, hedge funds and other mortgage holders, the source said. It would encourage the lenders to rewrite the distressed mortgages, converting them into affordable plans.

FDIC Chairman Sheila Bair told lawmakers last week that the existing $700 billion financial rescue plan gives the Treasury Department the power to use loan guarantees and credit enhancements to facilitate loan modifications and prevent avoidable foreclosures.

She told an international banking conference on Wednesday that the FDIC is “actively engaged” in talks with the Bush administration about the new program, which could provide economic incentives for lenders to modify distressed home loans into sustainable long-term loans.

“Such a framework is needed to modify loans on a scale large enough to have a major impact” and to get ahead of the curve on foreclosures, Bair said.

The source said that under the program, the government guarantees would include second loans on homes, such as home equity lines of credit, so that lenders would not lose any money in a mortgage modification.

The program would induce lenders to lower monthly mortgage payments through lower principal, term or interest rate, for a period that would likely be five years, the source said.

Additional reporting by Patrick Rucker; editing by Leslie Adler and Carol Bishopric