Treasury Secretary Henry Paulson said he is still exploring options to reduce interest rates on mortgages through government programs -- including a plan to reduce them to as low as 4.5%, as previously reported -- but he indicated the administration will not proceed with such a plan before President Bush leaves office without support from the incoming Obama administration. 

“We are continuing to explore options that would further reduce interest rates, mortgage rates, because I think that would be very, very powerful” in helping the housing market, he told FOX News’ Chief White House correspondent, Bret Baier, in an interview Tuesday. “But we do not have a proposal to make today.”

Paulson added, however, “It would be a very big proposal. That will be one that, if we were to make it, it would not have to be just this administration, it would have to be the next administration” as well.

A Treasury spokesperson said the department is “in regular communication” with the Obama transition team, but declined to say if the President-elect had signed on to any plan Treasury is considering to reduce mortgage interest rates.  A source close to the discussions said the Bush Administration could proceed with a plan if Mr. Obama does sign on.

A spokesperson for the Obama transition team did not immediately respond to a request for comment, but the President-elect has expressed support for additional assistance for the housing market, especially for homeowners facing foreclosure. So have many Democratic leaders in Congress: They have made it clear that if the Bush Administration does not proceed with additional help for individual homeowners in trouble before the president leaves office, assistance for them -- and possibly the broader housing market -- will be a top priority for the new Congress in January.

“We are focused on getting mortgage rates down,” Paulson said Tuesday. “That’s the number one thing we could do…I can’t think of anything that would be more helpful.”

“We thing the key to getting through this credit crisis -- one of the really critical elements here -- is the housing correction,” he said. “And as long as housing prices are continuing to decline at a fairly significant rate, it’s going to be hard for investors to value housing assets that are on the books of financial institutions, and obviously it is going to be very harmful to homeowners and those that are trying to refinance a home, those that are trying to sell a home.”

Earlier this month, sources said Treasury is considering a plan to provide new mortgages as low as 4.5%. The sources said it would exclude current homeowners wishing to refinance their mortgage, including those facing foreclosure. The plan would be limited to buyers taking out new loans to purchase a new or existing home. 

As previously reported, the department could launch the plan through mortgage finance giants Fannie Mae (FNM) and Freddie Mac (FRE), which the government took over in September.  A Congressional source familiar with the discussions previously said the Treasury could support the 4.5% mortgage 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. Details of the 4.5% mortgage plan -- including its size and any restrictions on who could qualify for the low-rate mortgages -- were not available.

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 -- a Treasury-backed 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.  Rates are down about a full percentage point, in part because of a recently launched Federal Reserve program to buy up to $600 billion in Fannie and Freddie securities.

An industry source previously said a 4.5% Treasury mortgage 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.

Also, many potential home 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.

On Tuesday, the National Association of Realtors called for a government-sponsored 4.5% mortgage interest “but down” plan, saying it would help sell an additional 500,000 homes. 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 have been lobbying Treasury to include refinancings of mortgages in its plan. They have 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.

Paulson and other Treasury officials have said repeatedly they are also looking at options to help avoid preventable foreclosures, to supplement recent moves such as a new streamlined mortgage modification program at Fannie Mae and Freddie Mac.

A Treasury mortgage plan could be announced 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 outline 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 recent speech 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.