Oct. 31 (Bloomberg) -- The White House and Treasury Secretary Henry Paulson are seeking 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 yesterday 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.

``We're going to need stabilizing of the housing market through unorthodox means,'' Desmond Lachman, a resident fellow at the American Enterprise Institute, said at a conference in Washington yesterday. ``You've got to get some kind of intervention'' to stop a ``vicious cycle'' of rising foreclosures sending home values lower and adding to pressure on borrowers, he said.

White House and Treasury 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.

Talks Continue

The White House is leading negotiations among federal agencies, including the Department of Housing and Urban Development, and nothing has been completed, the people said.

``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.

Dodd, joined by Democrats on his committee, demanded in yesterday's letter that the Treasury use its authority under the financial-rescue law ``to act decisively, aggressively and swiftly to reduce foreclosures.'' Because of the FDIC's ``demonstrated commitment,'' that agency is best suited to implement the program, the lawmakers wrote.

House Financial Services Committee Chairman Barney Frank of Massachusetts called last week for Bair to lead a ``government- wide effort'' to stem foreclosures.

Pitch Before Lawmakers

Bair, a bank regulator who has pressed the mortgage industry to modify loans, 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.

The American Bankers Association, a trade group representing lenders of all sizes, yesterday complained to the Treasury that regulators are ``forcefully'' pushing lenders to accept government capital injections. It also expressed concern about what it said was a lack of detail on conditions that will be placed on companies that take the bailout money.

``These bankers believe they are being asked -- in some cases pressured -- to participate in a program they did not seek and do not need,'' Edward Yingling, president of the ABA in Washington, wrote in a letter to Paulson.

Bank Shares

The Treasury made $250 billion available to buy preferred shares in banks in an effort to spur lending to businesses and consumers. Citigroup Inc., Wells Fargo & Co. JPMorgan Chase & Co. and six other large banks agreed to take $125 billion; the remainder is available to potentially thousands of others.

Bair told Congress last week that the bailout legislation also gave the government authority to set mortgage modification standards and offer guarantees for loans that meet those standards. Dodd, a Connecticut Democrat, said at the Oct. 23 hearing that he ``certainly was left with the impression that Treasury likes this idea, would like to get it going.''

Neel Kashkari, the interim head of the Treasury's bailout office, told Dodd the department is ``looking very hard'' at the proposal.

FDIC Experience

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 31, 2008 00:00 EDT