A Treasury plan to provide new mortgages as low as 4.5% would exclude current homeowners wishing to refinance their mortgage, including those facing foreclosure, a person familiar with the matter told FOX Business on Thursday. The plan would be limited to buyers taking out new loans to purchase a new or existing home. 

The source said the department is looking at “a number” of other options to help avoid preventable foreclosures. And some housing and housing finance trade groups are lobbying the Treasury to include refinancings in its plan, at least for homeowners facing foreclosure, an industry source said.

Neel Kashkari, the Interim Assistant Secretary for Financial Stability, said Thursday in testimony before the Senate Appropriations Subcommittee on Financial Services and General Government, “We continue to aggressively examine strategies to mitigate foreclosures and maximize loan modifications, which are a necessary part of working through the necessary housing correction and maintaining the strength of our communities…We will continue working hard to make progress here.”

Sources said the department could launch the plan through mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE). A low-interest mortgage plan could help stabilize the struggling economy and gyrating stock markets, sources said.

A Treasury Department spokesperson said, “We are not going to speculate on rumors.” And details of the plan -- including its size and any restrictions on who could qualify for the low-rate mortgages -- were not immediately available. Sources close to the discussions said Treasury officials have not made any final decisions on a low-interest mortgage plan; one financial industry source said that it was “too early to tell” what restrictions Treasury might place on applicants and on the plan’s size.

But a Congressional source familiar with the discussions said the Treasury could support the program by buying securities backing loans guaranteed by Fannie and Freddie, as well as those guaranteed by the Federal Housing Administration.  Those entities already guarantee about half of the nation’s $12 trillion in mortgages. Industry sources said the plan could finance hundreds of billions in new mortgages -- perhaps even $1trillion or more.

Any plan backed by the government likely would generate some losses to the Treasury, and thus taxpayers -- even in healthy housing markets, hundreds of thousands of homeowners default on their mortgages.

Because the government can borrow money much more cheaply than banks and other lenders -- currently at rates from 0.5% to about 2.5%, depending on length of the Treasury security -- the program offering 4.5% mortgages in theory could generate a profit for the government, assuming low default and foreclosure rates. Currently, lenders are offering about 5.5% on most 30-year fixed rate mortgages. 

An industry source said the Treasury plan could help clear the current large backlog of homes on the market. The backlog has depressed home prices in many parts of the country, which in turn has depressed values of some mortgage backed securities, a major contributor to current turmoil in the financial industry and financial markets.

Many potential buyers have been sitting on the sidelines, waiting for a bottom in the housing market before they purchase a home, as they don’t want to suffer paper losses on a purchase. Other previous government housing incentive programs, such as tax credits, have been limited to first-time homebuyers and principal residences; they are often capped by income limits and other restrictions as well.

Economist Ed Yardeni, president of Yardeni Research, has proposed a government-sponsored plan to provide mortgages with a 4% interest rate to home buyers for a limited period. He estimates his plan would finance the purchase of five million homes, exceeding the current inventory of 4.5 million homes now on the market.  Yardeni would limit his plan to $1 trillion.

Housing and housing finance trade groups lobbying the Treasury to include refinancings of mortgages in its plan noted that other plans to help struggling homeowners have included income tests, loan-to-value guidelines and other requirements. Such plans have also been restricted to principal residences.

The Treasury plan could be announced next week, as part of any Bush Administration request to Congress to allow the Treasury to tap the $350 billion second tranche of funding in the $700 billion economic stabilization plan Congress approved in October. Under the legislation, the administration must detail for Congress what it plans to do with the funding. Of the first $350 billion released in the plan, only $15 billion remains unspent or uncommitted by Treasury.

However, Treasury could implement a low-interest mortgage program outside of the economic stabilization plan simply by using its existing authority to issue Treasury securities, to raise the funds needed to finance the mortgage program, a financial industry source said.

In a speech today at a Federal Reserve housing conference, Fed Chairman Ben Bernanke suggest additional ways the government could assist struggling homeowners, including direct partial subsidies of their mortgage payments.

This approach “would have the government share the cost when the servicer reduces the borrower’s monthly payment,” Bernanke said. “For example, a servicer could initiate a modification and bear the costs of reducing the mortgage payment to 38% of income, after which the government could bear a portion of the incremental cost of reducing the mortgage payments beyond 38%, say to 31%, of income.”

Democrats in Congress and President-elect Barack Obama continue to push for government assistance for homeowners facing foreclosure. “We've got to start helping homeowners in a serious way, prevent foreclosures,” Mr. Obama said at a press conference yesterday. “The deteriorating assets in the financial markets are rooted in the deterioration of people being able to pay their mortgages and stay in their homes.  And if we help Main Street, ultimately, we're going to help Wall Street.”