Sources close to the policy process tell Fox Business that the Bush Administration is considering improvements in the Federal Housing Administration’s “Hope for Homeowners” program, to make participation more attractive to banks, thrifts and other mortgage holders.

Hope for Homeowners offers incentives to mortgage holders to modify loans by refinancing them at better terms for homeowners, to prevent home foreclosures.

A financial industry source said movement on foreclosure measures could come "shortly."

A revised version of the program could be announced as an alternative -- or a supplement -- to the foreclosure prevention plan proposed to the White House by the Federal Deposit Insurance Corporation last month, sources said. The FDIC plan would target up to 3 million homeowners struggling with mortgage payments and facing foreclosure, providing government loan guarantees in some form on up to $500 billion to $600 billion in subprime and other mortgages--which could cost taxpayer billions in losses if homeowners end up defaulting. Sources say the FDIC estimates losses as high as $50 billion – a price tag that may lead thei White House to approve a scaled down version of the FDIC plan.

Hope for Homeowners, launched October 1, is separately offering FHA government mortgage insurance up to $300 billion in mortgages held by banks, thrifts and other mortgage holders. When it was approved by Congress in July, supporters said it could help up to 2.2 million homeowners facing foreclosure. The Congressional Budget Office estimated that once the FHA rolled the program out, up to 400,000 homeowners could eventually qualify for it, with about a third defaulting even after their loans were modified, at a cost of up to $1.7 billion to taxpayers.

Under Hope for Homeowner’s current provisions, mortgage holders must refinance the loan starting with the current market value of the home—in many cases, much lower now than the original purchase price. They then have to agree to reduce the principal on the mortgage by an additional 10%, to create “instant equity” for homeowners. As a result, mortgage holders face possible significant losses on a mortgage by agreeing to participate in Hope for Homeowners.

At the same time, homeowners must agree to turn over at least 50% of the profits on the eventual sale of a home—and more, if they sell their home within five years of participating in the program. Participation is voluntary and both the lender and homeowner must agree to the modifications.

But Hope for Homeowners has been widely criticized for its eligibility requirements, which some housing advocates and financial industry officials say are punitive and unattractive to both mortgage holders and homeowners. Critics also say restrictions make it difficult for many homeowners to qualify for the program. As of last month, the FHA had received applications on just over 80 mortgages for the program. An FHA spokesman did not provide updated application figures.

In a conference call hosted October 30 by Inside Mortgage Finance, a trade publication, the FHA’s Director of the Office of Single Family Mortgage Development, Margaret Burns, called Hope for Homeowners “very complex” and said that large lenders who have considered the program found the number of homeowners eligible for it “very slim” -- even before assessing if these homeowners could meet its qualifications.

Sources say revisions to Hope for Homeowners could make it less costly for mortgage holders to participate, possibly by reducing or eliminating the 10% “instant equity” requirement, among other possible revisions under review.

An FHA spokesman said, “As we've noted, ‘H4H’ is just another option that we have added to the tool box. Borrowers and lenders are still expressing interest, but it is still too soon for any meaningful data.”

White House spokesman Tony Fratto would not comment on possible changes to the Hope for Homeowners, saying only, “We’re looking at a number of different proposals. There’s an ongoing policy process.”

Sources said the White House could end up deciding to support both the FDIC plan and a revised Hope for Homeowners, as the FDIC plan would allow restructured mortgages to stay on an institution’s balance sheet – if an institution wanted that option -- while a less costly Hope for Homeowners would allow an institution to take a restructured mortgage off its balance sheet by turning it over to the FHA, if it wanted to take that option. 

President-elect Brack Obama supports mortgage modifications and other assistance for struggling homeowners. During his campaign, he announced several housing proposals, including a $10 billion foreclosure prevention fund to refinance mortgages and provide mortgage counseling to struggling homeowners. While Senator Obama supported the housing bill that created Hope for Homeowners in July, he was campaigning that month and did not return to Washington to vote on the measure.