U.S. housing bailout plan has virtues, challenges

Washington's tentative efforts to stabilize the housing market have unnerved financial markets, but investors were encouraged by signs on Thursday that an aggressive rescue plan was finally on the way.

While investors generally oppose programs that let homeowners escape the original terms of a mortgage, a comprehensive plan could get Wall Street's backing.

"The critical thing is how they structure the qualification process," said Mahesh Swaminathan, a strategist at Credit Suisse in New York. "Who gets it, and how is it done simply and transparently?."

"If it doesn't force one party to take the bulk of the losses, that would very materially benefit the securities market," he added.

The Obama plan envisions that the government would make matching payments with mortgage servicers to cover some monthly costs, sources familiar with the plan have said. That program could quickly outstrip a $50 billion kitty of federal money that is earmarked for foreclosure prevention, according to data compiled by Amherst Holdings LLC.

Monthly payments on an estimated $1.17 trillion in defaulted loans total about $8.8 billion, so the subsidy would be depleted in a year if the government picks up half the tab, said Sean Dobson, Amherst's CEO.

Still, Obama and Treasury Secretary Timothy Geithner have said they may seek more federal rescue funds if needed.

A total of 8.1 million U.S. homes, or 16 percent of all households with mortgages, could fall into foreclosure by 2012, according to Credit Suisse.

As the housing crisis reaches the two-year mark and foreclosures continue to climb, there is some political will for a bold program to control the spread of failing loans.