The government is considering a plan that would help around 3 million homeowners avoid foreclosure, sources briefed on the matter said.  A final deal had not been reached as of Wednesday afternoon and negotiations could still fall apart, but government agencies were contemplating using around $50 billion from the recently passed bailout of the financial industry to guarantee about $500 billion in mortgages.  This new plan could include loan modifications that would lower interest rates for a five-year period, according to two people briefed on the mortgage loan modification plan, who asked not to be identified because details were still being worked out and the plan was not yet public.  This foreclosure prevention plan would be the most generous effort yet to limit damages from the U.S. housing recession, which has damaged credit markets globally. 

More than four million American homeowners with a home loan were at least one payment behind on their mortgage at the end of June, and 500,000 had started the foreclosure process, according to the most recent data from the Mortgage Bankers Association.  The government’s program would be run by the Federal Deposit Insurance Corp. The agency’s chairman, Sheila Bair, said last week she was working “closely and creatively” with the Treasury Department on such a plan, but revealed few details.  Andrew Gray, an FDIC spokesman, said it would be “premature to speculate about any final framework or parameters of a potential program.”  Treasury Department spokeswoman Jennifer Zuccarelli called details of the loan modification plan “simply inaccurate.” She said the Bush administration “is looking at ways to reduce foreclosures, and that process is ongoing,” but has not decided on a final approach.

Borrowers across the country have expressed anger over the government’s existing loan assistance programs, which critics say have been too slow and small in scope to have much impact on soaring foreclosures.  On Wednesday, about 100 demonstrators marched in front of the headquarters of Fannie Mae, and forced a mid-afternoon meeting with the company’s chief executive, Herbert Allison.  Some held signs that read “Restructure our mortgage loans now,” “Fannie Mae destroys lives” and “Foreclose on Fannie Mae.”  Bruce Marks, chief executive of the Boston-based Neighborhood Assistance Corp. of America, called on Fannie Mae to adopt a program similar to the one the FDIC put in place at failed IndyMac Bank of Pasadena, Calif. Borrowers there are getting interest rates of about three percent for five years.

According to Nationwide Marketing president Bryan Dornan, “Clearly homeowners need a new opportunity to improve their mortgage payment when they do not qualify to refinance their existing home loan.” Dornan continued, “In some cases refinancing just doesn’t helped enough, so loan modification will help the homeowner, while providing a cost-effective solution for the lender because foreclosures are expensive and property values have been declining quickly.”  

The nation’s top mortgage lenders will continue their discussions with the government regarding foreclosure prevention.  Over the past 10 weeks, Fannie Mae says it has received more than 40,000 defaulting loans and stopped eighty percent of them from going into foreclosure.  After meeting with Allison, Marks said the chief executive “understands the issue of making these mortgages affordable over the long term.”  Last month, the government seized control Fannie Mae and Freddie Mac, the two biggest U.S. mortgage finance companies, with a rescue plan that could require the Treasury Department to inject as much as $100 billion into each to keep them afloat.

It was unclear Wednesday what role Fannie and Freddie would play in the government’s sweeping plan to help millions of American homeowners. But lawmakers on Capitol Hill want the companies to take a more aggressive approach.  Sen. Christopher Dodd, D-Conn., the chairman of the Senate Banking Committee said in a statement that “federal agencies and financial institutions must do more to modify the mortgages they hold in order to stop foreclosures and help families keep their homes.” By guaranteeing millions of mortgage loans, the government could help restore confidence in the market for securities backed by home loans. That was where the global credit crisis started, leading to this month’s dramatic stock market plunge.   As a surprising number of homeowners began defaulting on their loans, investors could no longer put a value on the securities which were backed by pools of mortgages.