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WASHINGTON/NEW YORK (Reuters) - A housing rescue plan being considered by the Obama administration could strike at the heart of the credit crisis but its scale, complexity, and the potential for controversy poses challenges for policymakers.
The plan is due to be announced by President Barack Obama on Wednesday and is expected to break new ground by helping troubled borrowers even before they miss a mortgage payment.
If it works, officials will have a standardized approach to quickly determine whether a borrower is in trouble, revalue the home, and set new mortgage terms under a program that could help contain losses for banks that have incurred huge losses on bad housing investments.
The hope is that a uniform standard will do two things: give legal cover to rewrite loan terms and provide a universal template to quickly churn through the rolls of troubled borrowers. Mortgage servicers, the companies that collect a borrower's monthly payments, are often hamstrung by contracts and cannot loosen loan terms.
"Currently, there are 57 varieties of mortgage modification plans out there. That is totally disabling," said John Courson, president of the Mortgage Bankers Association.
If all troubled borrowers went through a standard program, mortgage experts could process loans quickly, he said.
"We need this cookie-cutter approach," Courson said.
Wall Street stock indexes erased nearly 250 points of losses, or 3.0 percent, Thursday afternoon as investors digested a Reuters report detailing the mortgage aid plan.
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.
And policymakers may not have such a hard time crafting new standards since Wall Street is now relying on Washington for billions of dollars in emergency financing.
On Friday, Citigroup Inc (C.N), JPMorgan Chase & Co (JPM.N), and Morgan Stanley (MS.N) all agreed to suspend home foreclosures. In all, those lenders have received $80 billion in taxpayer investments.
"I'd bet anyone who is getting government aid is going to be mandated (to take part in the modification program)," Courson said.
Still, developing standards will not be easy, and the Obama administration will have to sell the public on the idea of helping borrowers in good standing who could wrongly get relief under the program.
"There is no test that I have seen that can't be gamed by someone who is clever enough and determined enough to do so," said David John, a senior fellow at the right-leaning Heritage Foundation, a Washington think-tank.
A poorly-managed program raises the prospects of irate neighbors turning on one another because one family sought aid while the other did not.
But consumer advocates argue that failed mortgage relief programs of the last year prove that waiting until a borrower is delinquent means waiting too long to do any good.
"I think we could live with that," Courson said of giving aid to borrowers who are currently timely but could face problems making their payments.
Additional reporting by Julie Haviv and Jonathan Stempel in New York and Andrea Hopkins in Cincinnati