January 23, 2008 / 11:16 PM / in 10 years

UPDATE 3-Key U.S. senator proposes program to buy mortgages

(Recasts first paragraph, rewrites throughout)

By Patrick Rucker

WASHINGTON, Jan 23 (Reuters) - Washington would spend billions of dollars to buy faltering U.S. home loans to save borrowers from being driven to foreclosure under a plan proposed on Wednesday by a leading Democratic lawmaker.

The initiative would start with a cash boost from taxpayers of up to $20 billion to buy the first batch of failing loans and help underwrite the program proposed by Christopher Dodd, the chairman of the U.S. Senate Banking Committee.

Foreclosures have climbed and investors have shunned mortgage loans in recent months, driving down their value. In a letter to Senate Majority Leader Harry Reid released on Wednesday, Dodd said he envisioned an entity that would buy troubled mortgages at current “discount” prices and issue new loans to borrowers under more favorable terms.

Those new, marked-down mortgages would either be insured by the Federal Housing Administration or backed by Fannie Mae and Freddie Mac, he said, two government-sponsored enterprises that guarantee home loans.

Dodd’s bailout plan is aimed at stemming a wave of failing loans as the rate of new foreclosures reached a record at the end of last September and as millions of marginal borrowers struggle to make payments on home loans that were offered under lax credit terms. Some of Wall Street’s largest banks have taken multibillion dollar write-downs as home loans offered through the middle of last year go bad.

The Dodd proposal resembles the Home Owners’ Loan Corporation founded in the mid-1930s to refinance homes that were heading toward foreclosure during the Great Depression and ended by delivering a small profit to the government.

Some analysts have said that the current mortgage crisis calls for the same strong medicine and that mortgage assets are now underpriced as they were in that past era.

“If you believe that markets overshoot both upward and downwards then you understand that this could prevent some unnecessary damage,” said Alex Pollock, a scholar with the conservative American Enterprise Institute think-tank in Washington. (Editing by Leslie Adler)

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