Dec. 3 (Bloomberg) -- Treasury Secretary Henry Paulson is considering a new plan to lower mortgage rates in an effort to resuscitate the U.S. housing market, a government official said.

The Treasury, which already has a program to buy mortgage- backed securities issued by Fannie Mae and Freddie Mac, could step up those purchases to drive down interest rates on some loans to 4.5 percent, the official said on condition of anonymity. The plan is preliminary and could change.

The deliberations come as President-elect Barack Obama pledges fresh action to help American homeowners, and on top of a $600 billion initiative announced by the Federal Reserve last week to buy mortgage debt. Mortgage applications surged by a record last week and the average rate on a 30-year fixed-rate loan dropped to 5.47 percent, the lowest level since June 2005, the Mortgage Bankers Association said today.

“There’s a good chance that the worst of the recession will be behind us” if mortgage rates can be brought down to 4.5 percent, said Mark Vitner, a senior economist at Wachovia Corp. in Charlotte, North Carolina. “Lower mortgage rates will allow households to fortify their balance sheets, and we will likely see consumer spending come back a little quicker than it would otherwise.”

While lowering mortgage rates to 4.5 percent would allow most homeowners to refinance into a cheaper loan, far fewer will actually qualify, said Rajiv Setia and Nicholas Strand at Barclays Capital in New York.

Can’t Force Banks

“Over 90 percent of the mortgage universe out there would be refinancable, but you can’t force banks to lend to people,” said Setia, a fixed-income strategist for Barclays.

The Wall Street Journal reported the proposal earlier today.

The Bush administration has been faulted by Democrats and consumer advocates for failing to take sufficient steps to stem record home-loan foreclosures this year. Federal Housing Finance Agency Director James Lockhart has been prodding private mortgage servicers and bond investors to cooperate with government efforts to modify or refinance loans for troubled borrowers.

Washington-based Fannie and McLean, Virginia-based Freddie, seized by FHFA on Sept. 6 after examiners found the companies’ capital to be too low or of poor quality, own or guarantee about $5.2 trillion of the $12 trillion U.S. home-loan market.

Only Helps Agencies

Strand, Barclay’s head of agency mortgage bond strategy, said between 20 percent and 25 percent of U.S. loans originated in 2006 and 2007 are currently underwater and wouldn’t qualify for refinancing through Fannie and Freddie, which require borrowers to maintain at least 3 percent equity in their homes.

“So this would help, but it only helps agency borrowers,” Strand said. “I don’t see how this would help other non-agency borrowers who essentially can’t even get a mortgage at this point.”

Agency mortgage securities are guaranteed by federally chartered Fannie or Freddie, or by government agency Ginnie Mae.

Yields over benchmarks on agency mortgage bonds have widened as mortgage rates tumbled. The difference between yields on Washington-based Fannie’s current-coupon 30-year fixed-rate mortgage bonds and 10-year Treasuries widened to as high as 208 basis points today, the closing level the day before the Fed’s announcement. A basis point is 0.01 percentage point.

Bloomberg current-coupon indexes represent the average of yields for the two groups of mortgage bonds with prices just above and below face value, the ones lenders typically package new loans into. The spread helps determine the rates offered to homeowners on new prime mortgages of $417,000 or less in most areas, and up to $625,500 in high-cost locations.

Increasing Portfolios

When taking over Fannie and Freddie, the largest U.S. mortgage-finance companies, Treasury Secretary Henry Paulson said that he would direct the firms to increase their $1.5 trillion mortgage-asset portfolios and have his department start buying their home-loan bonds to help lower the cost of home financing.

Last week, the Fed announced plans to buy as much as $500 billion of agency mortgage securities, as well as $100 billion of Fannie, Freddie and Federal Home Loan Bank corporate debt.

To contact the reporter on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net; Dawn Kopecki in Washington at dkopecki@bloomberg.net.

Last Updated: December 3, 2008 18:07 EST