Feb. 18 (Bloomberg) -- U.S. President Barack Obama pledged $275 billion to a program that will cut mortgage payments for as many as 9 million struggling homeowners and expand the role of Fannie Mae and Freddie Mac in curbing record foreclosures.

The plan also will help as many as 5 million homeowners refinance loans owned or guaranteed by Fannie and Freddie, according to a White House fact sheet. Treasury will buy as much as $200 billion of preferred stock in the two mortgage companies, twice as much as previously promised, the announcement said.

“It will give millions of families resigned to financial ruin a chance to rebuild,” Obama said in remarks prepared for delivery at 10:15 a.m. in Mesa, Arizona. “By bringing down the foreclosure rate, it will help to shore up housing prices for everyone.”

The program signals the Obama administration plans to take a more aggressive stance to halt foreclosures than the Bush administration, which backed voluntary industry efforts. Record foreclosures in the past year are swelling the glut of properties on the market, forcing down home values and undermining homebuilders’ efforts to revive demand and lighten inventory by cutting prices.

U.S. builders broke ground in January on the fewest houses on record as a lack of credit and plunging sales exacerbated the worst real-estate slump in 75 years. Confidence among homebuilders barely rose in February from a record low, an industry index showed yesterday, signaling the slump continues.

Bankruptcy Reform

Obama said he will support revamping U.S. bankruptcy rules to let judges reduce mortgages on primary residences to fair- market value as long as borrowers pay their debts under a court- ordered plan.

The Obama plan will use $75 billion from the $700 billion financial bailout fund to match reductions lenders make in interest payments that lower borrowers’ payments to 31 percent of their monthly income. Under the program, a lender would be responsible for reducing monthly payments to no more than 38 percent of a borrower’s income, with government sharing the cost to further cut the rate to 31 percent.

Treasury will share the cost when lenders reduce monthly payments by forgiving a portion of the borrower’s mortgage balance, the government said. The program may help as many as 4 million borrowers, the administration said. The average borrower’s home value could be stabilized against a price decline by up to $6,000, the White House fact sheet said.

‘Aimed at Homeowners’

“We think it is accurately aimed at homeowners at risk that are most likely to represent avoidable foreclosures, so it is likely to have a maximum impact where the dollar is committed,” said Robert Davis, executive vice president of the American Bankers Association, in a telephone interview.

Banks accepting help from the government must adopt loan modification plans, the government said.

Companies that service mortgages will get $1,000 for each modified loan, and as much as $1,000 for three years when the borrower stays current, the government said. Homeowners also are eligible for $1,000 annually for five years for remaining current on their loans, according to the plan.

Mortgage servicers will get $500 and loan holders $1,500 to modify agreements as an incentive for the industry to seek out borrowers at risk of falling behind on their payments.

“The Obama team is betting that if they can afford to stay in the home month-to-month, that borrower is not concerned about what today’s value of the home happens to be,” Howard Glaser, former counsel to the secretary of the U.S. Department of Housing and Urban Development, said today in a telephone interview. “I think that’s the right bet.”

Mortgage Principal

Focusing on reducing the mortgage principal would have been a “prohibitively expensive proposition,” said Glaser, a Washington-based mortgage-industry analyst.

Treasury will increase the size of Fannie and Freddie’s retained mortgage portfolios, to $900 billion, allowed under the preferred stock agreement included in the September federal takeover of the two mortgage-finance companies.

“It is an indication they are not looking at shuttering them to move their responsibilities elsewhere. That has been a widely discussed option,” said James Vogel, a debt analyst with FTN Financial in Memphis, Tennessee, in an e-mailed statement.

An administration official, speaking to reporters in Washington, said the Treasury’s pledge of support for Fannie and Freddie is intended to build confidence that the government stands fully behind the two mortgage-finance companies. The official said the two aren’t yet close to reaching the initial limit of $100 billion in government support.

Fannie, Freddie

The additional $200 billion in funding will be made under a foreclosure-prevention law Congress enacted in July, the administration said.

The White House also plans to improve Hope for Homeowners and other Federal Housing Administration programs to modify and refinance mortgages at risk of foreclosure.

Banks including Citigroup Inc., JPMorgan Chase & Co., PNC Financial Services Group Inc. and Bank of America Corp. have agreed, at the request of lawmakers, to suspend foreclosure proceedings until the Obama plan is adopted. The Office of Thrift Supervision last week urged the lenders it oversees to suspend foreclosures.

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net.

Last Updated: February 18, 2009 11:15 EST