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Obama plan for US property crisis expected next week

One of several options being discussed is subsidizing lenders who cut the interest rate on mortgages using part of $50 billion that has been set aside for a property owner relief programme.

Officials are looking at legislation to allow bankruptcy judges to change the terms of mortgage loans, a measure that is generally opposed by the industry. But it would also include legal protections for lenders that modify loans but fear being sued by investors.

Government subsidies could be among the inducements for lenders to reduce interest rates and also under discussion is a plan where the government would share the cost to lenders of reducing interest rates for cash-strapped borrowers.

It is still unclear how the programme would be administered, but mortgage financing companies Fannie Mae and Freddie Mac that are now stated owned would be involved.

Property owners could be required to apply for the programme and submit to an affordability test as well as receive an appraisal of their home.

'This option has the advantage of being fairly simple. You don't need a large federal bureaucracy to do it. It is far cheaper to reduce mortgage payments than it is it to acquire a distressed property or even guarantee the loss on that property,' said Howard Glaser, a housing industry consultant and a housing official during the Clinton administration.

Under this plan the government would also be able to reach homeowners before they fell into delinquency, a problem with many existing loan modification plans, Glaser added.

Alan White, an assistant professor at Valparaiso University School of Law, said lenders should be lowering interest rates to affordable levels without government aid. In most cases, putting homeowners in a new loan with lower payments is still a better deal for lenders and investors than foreclosure, he said.

Consumer advocates and the banking industry are anxiously awaiting the Obama administration's plan for addressing the property crisis. The Office of Thrift Supervision, which regulates savings and loans, has urged its lenders to stop foreclosures until the plan is unveiled.