Bush administration widens homeowner aid

An auction sign is displayed in front of a home in Stockton, California February 2, 2008. (REUTERS/Kimberly White)

WASHINGTON (Reuters) - The Bush administration will loosen rules that underpin the largest U.S. homeowner aid program in order to help more borrowers who have seen their home drop in value and are facing foreclosure, a senior administration official said on Wednesday.

Brian Montgomery, head of the Federal Housing Administration, told lawmakers that his program would encourage lenders to erase some of a failing loan amount in order to receive a government guarantee of timely payments.

"We will permit and encourage lenders to voluntarily write down outstanding principal," Montgomery told the House Financial Services Committee, in his written statement.

Montgomery stressed that the he wanted to preserve the self-funding structure of FHA and not put taxpayers on the hook for failing loans. Unlike a proposal by Democratic lawmakers, the plan outlined by Montgomery would not required a big cash-infusion to get started.

"This new administrative change will ensure the integrity of the FHA insurance fund over the long-term, protect the taxpayer, and guarantee that FHA will be around to help struggling homeowners in the future," he said in his prepared remarks.

Washington policymakers have faced increasing pressure to help staunch increasing foreclosures that are threatening to drive the U.S. economy into a deep recession.

The Federal Housing Administration is a Depression-era program that underwrites a borrower's monthly mortgage payments and so helps him win more favorable loan terms. The program was conceived to help low-income borrowers but policymakers have lately focused on its potential to help today's troubled borrowers who are at risk of losing their home.

(Reporting by Patrick Rucker; Editing by Tom Hals)