Plan to refinance mortgages may save millions of homes

— -- The government is weighing a plan to restructure hundreds of billions of dollars in home mortgages, its most ambitious effort yet to curb high foreclosures.

The plan is expected to help 2 million to 3 million homeowners at risk of losing their homes and cost the Treasury Department $40 billion to $50 billion, according to two sources familiar with the matter. The plan is still being finalized, and the details could change, the sources said. They declined to speak on the record because they were not authorized to discuss the proposal.

Under the proposal discussed, banks, thrifts and other mortgage servicers would stave off foreclosures by restructuring loans based on a homeowner's ability to pay. They could do so by lowering homeowners' principal balance, reducing interest rates or changing the loan terms.

Foreclosures in the past year have dragged down the economy. In September, foreclosure filings hit 265,968, a 12% decrease from the previous month but up 21% from September 2007, according to RealtyTrac. While the pace of foreclosures has slowed because of recent prevention efforts, mortgage delinquencies continue to grow.

In September, homeowners were at least 90 days late on 4.6% of outstanding mortgages, up from 2.9% in September 2007, according to First American CoreLogic.

The government's latest plan to help struggling homeowners goes well beyond previous private and government efforts. It addresses the largest number of homeowners yet in a standardized way, instead of encouraging lenders to deal with borrowers on a case-by-case basis. Sheila Bair, chairman of the Federal Deposit Insurance Corp., said last week that the government is working to craft a plan that would help beleaguered homeowners.

"Specifically, the government could establish standards for loan modifications and provide guarantees for loans meeting those standards," Bair said. "By doing so, unaffordable loans could be converted into loans that are sustainable over the long term."

Andrew Gray, a spokesman for the FDIC, said the agency has had "productive conversations with Treasury and the (Bush) administration about options for the use of credit enhancements and loan guarantees." Still, he said, "it would be premature to speculate about any final framework or parameters of a potential program."