U.S. working on affordable mortgage plan: sources

By John Poirier and Rachelle Younglai

WASHINGTON (Reuters) - The Treasury Department is developing a plan to try to reduce mortgage rates on home loans to 4.5 percent on typical mortgages by expanding its purchases of mortgage backed securities, sources familiar with the plan said on Wednesday.

The plan would see mortgage finance companies Fannie Mae <FNM.N> and Freddie Mac <FRE.N> expand their purchase of mortgage securities to help drive down borrowing costs, the sources said.

The 4.5 percent target interest rate is roughly one percentage point lower than the average rate currently on a 30-year, fixed rate mortgage.

Both the mortgage giants, which finance or guarantee about half of all U.S. mortgages were effectively nationalized by regulators in September after losses on mortgages eroded their capital.

Since they were taken over, the two largest sources of U.S. mortgage finance have become tools for policymakers wishing to lower the cost of home loans and break a wave of foreclosures.

The move would supplement a program announced last week by the Federal Reserve under which it plans to buy up to $600 billion in assets and debt from government-sponsored enterprises like Fannie Mae and Freddie Mac, one source said.

The announcement by the Fed last week helped to lower home mortgage rates by about a half-percentage point and sparked a jump in refinancings among homeowners.

U.S. mortgage applications surged by a record amount last week on news of the Fed's investments in Fannie Mae and Freddie Mac securities, according to data from the U.S. Mortgage Bankers Association on Wednesday.

RESCUE FUNDS

U.S. Treasury Secretary Henry Paulson has doled out hundreds of billions of dollars of a $700 billion financial rescue fund to banks since mid-October in an effort to stabilize financial markets.

But lawmakers have criticized Paulson for making big investments in banks while not giving direct aid to struggling homeowners.

Paulson has said he is duty-bound to help troubled borrowers under the terms of the rescue package and that he has been developing a new workable plan, after earlier abandoning a plan to buy bad loans from banks.

Paulson has been weighing whether to ask Congress for the second half of the $700 billion fund and is certain to face tough questions from lawmakers about how the first $350 was allocated.

(Reporting by John Poirier and Rachelle Younglai)

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