Oct. 30 (Bloomberg) -- The White House and Treasury Secretary Henry Paulson want to scale back a proposal by Federal Deposit Insurance Corp. Chairman Sheila Bair to guarantee mortgages to help stem foreclosures, according to two congressional aides briefed on the matter.

The Bush administration is reluctant to sign off on the plan because of its cost, the two people indicated. Bair's idea to provide guarantees for modified loans could take as much as $50 billion from the $700 billion bailout package approved by Congress this month.

The tussle comes as Democrats intensify pressure on the administration to help more Americans keep their homes instead of focusing on a rescue for Wall Street firms. Senate Banking Committee Chairman Christopher Dodd today sent a letter to President George W. Bush urging him to have the Treasury create the program and let the FDIC design and implement it.

The Treasury Department must use its authority under the financial-rescue law ``to act decisively, aggressively and swiftly to reduce foreclosures,'' Dodd wrote in the letter also signed by Democrats on his committee.

``Given the FDIC's demonstrated commitment to the goal of foreclosure prevention, and its proven track record in achieving results, the FDIC is clearly the federal agency best suited to implementing this program quickly and efficiently,'' they wrote.

`Government-Wide Effort'

House Financial Services Committee Chairman Barney Frank and Representative Maxine Waters, a California Democrat who serves on Frank's panel, urged Bush in an Oct. 20 letter to have Bair lead a ``government-wide effort'' to stem foreclosures.

``There's pressure to do something from everyone for homeowners,'' said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. The FDIC plan is ``the only thing on the table.''

Administration officials are concerned the program, intended to help as many as 3 million homeowners through $500 billion of mortgage guarantees, would give a windfall to banks that made bad loans. The White House is leading negotiations among the federal agencies, including the Department of Housing and Urban Development, and nothing has been completed, the people said.

Talks Continue

``The administration, including the White House offices, HUD and Treasury, has been looking at ways to reduce foreclosures, and that process is ongoing,'' said Jennifer Zuccarelli, a Treasury spokeswoman in Washington.

Bair, a bank regulator who has pressed the mortgage industry to modify loans to reduce foreclosures, unveiled the idea during a Senate Banking Committee hearing last week.

``Loan guarantees could be used as an incentive for servicers to modify loans,'' she said at the Oct. 23 hearing. ``The FDIC is working closely and creatively with Treasury to realize the potential benefits of this authority.''

The Treasury, which is overseeing the $700 billion bailout package, has focused on buying stakes in banks and setting up auctions for devalued securities. Bair told Congress the legislation gave the government authority to set mortgage modification standards and offer guarantees for loans that meet those standards.

Dodd Role

Dodd, a Connecticut Democrat, said at the hearing that he understood Paulson to be supporting the idea after speaking with him about it.

``I'm understanding there's some details to be worked on, but I certainly was left with the impression that Treasury likes this idea, would like to get it going,'' Dodd said Oct. 23.

Neel Kashkari, who was designated to run the Treasury's bailout office, told Dodd the department is ``looking very hard'' at the proposal.

The FDIC is already modifying mortgages held by IndyMac Federal Bank FSB, the successor to the failed lender that is being managed by the agency, to serve as an industry model. The modifications have cut borrowers' average monthly payments by more than $380, Bair said.

Lawmakers are pressing for more action to forestall foreclosures days before U.S. presidential and congressional elections.

Foreclosures rose to the highest on record in the third quarter, led by California, Arizona, Michigan and several pivotal states in the presidential contest -- Florida, Ohio and Nevada, according to data compiled by RealtyTrac.

Bair's proposal would require banks, savings and loans, hedge funds and other mortgage holders to restructure mortgages based on a borrower's ability to repay, according to people familiar with the matter. Under one option, the industry would reduce monthly payments on troubled loans for five years, they said.

The government's partial guarantees for the loans would put taxpayers on the hook for potential losses if a homeowner defaulted.

To contact the reporters on this story: Alison Vekshin in Washington at avekshin@bloomberg.net; Robert Schmidt in Washington at rschmidt5@bloomberg.net.

Last Updated: October 30, 2008 19:37 EDT