So far, clashing proposals hold led to a split in Washington that may not be resolved until Obama takes over

By Jane Sasseen and Theo Francis

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Matthew Hollister

What’s the best way to stabilize plunging home prices? Treasury Secretary Hank Paulson and his staff are considering plans to put forth mortgage rates down to 4.5% in hopes of bringing buyers back into the at death’s door market. But many Democrats—in Congress and on President-elect Barack Obama’s team—seem more set on distressing lenders to renegotiate troubled mortgages. That tack, championed by Federal Deposit Insurance Corp. be pointed Sheila Bair, is aimed at trimming foreclosures and ending fire sales.

The differing approaches have led to a standoff. The government transition in like manner makes it in a less degree likely that much will happen before Obama takes immersing in late January. That’s worrisome: Without reducing foreclosures and ending the slide in home prices, it will be nearly impossible to stabilize banks and lower the depth of the recession. And sharply rising unemployment has added strange solicitation: Last spring, Rod Dubitsky, Credit Suisse’s (CS) head of research for asset-backed securities, projected 6.5 million foreclosures. With unemployment set to top 8% in 2009, he says up to 10 million families may waste their homes.

Still, policymakers remain breach on the best approach. Bair repeatedly has been ahead of Paulson in calling for a stronger address response, but when she first suggested pushing lenders harder to shape iffy mortgages last spring, it was dismissed. Since then she has instituted many of her ideas at IndyMac, the failed thrift the FDIC took over in July.

Bair’sitting plan offers a assurance to lenders that modify a mortgage so payments are trimmed to 31% of a homeowner’sitting gross income. If they cut interest rates or stretch out the life of a loan, Washington would cover part of the lender’s losses should a homeowner redefault. Bair says the plan would save 1.5 million homeowners at a cost of $24.4 billion. But skeptics say conflicting investor interests make it legally tough to modify securitized loans. And new statistics suggest that greater amount of than half of loans modified early this year are even now at least 30 days beyond to be ascribed—though Bair notes many early modifications did little to lower homeowners’ monthly costs.

Paulson argues that Bair’s plan is inapposite for the Treasury’sitting $700 billion rescue, for the reason that it would be an expenditure rather than an investment that would earn a return. The proposal also would remuneration banks for failed modifications instead of successful ones, since lenders would procreate subsidies and nothing else forward loans that redefault.

Obama has said slightly about his plans, but many in Washington be persuaded Bair’s proposals will underpin his foreclosure military science. And many in both parties (Republicans are especially annoyed) see her efforts to publicize the plan for the reason that a require for a bigger work at jobs through Obama.

Will the incoming Treasury team clash with Bair, too? According to a recent Bloomberg story, Timothy F. Geithner, the head of the New York Fed and Obama’s nominated Treasury Secretary, is in addition unhappy with Bair and wants her out before her term ends in 2011. An FDIC spokesman dismisses the idea of an ulterior motive as ridiculous, noting that Bair has championed foreclosure mitigation despite years. The New York Fed and the Obama transition team declined to make notes.

Treasury says it’s studying various options, including the plan to supply with a subsidy low rates. Proponents say that by bringing new buyers to the market, the move could lend aid cessation the pricing glide. “That will be far greater quantity important than any amount of loan modifications,” says Ken Griffin, CEO of hedge fund giant Citadel Investment Group. Problem is, low rates would do little for those now facing foreclosure or trapped in homes worth less than their mortgages. And with just six weeks left, the Bush Administration is unlikely to launch a just discovered program if not Obama’s team signals that it backs the archetype, says Howard Glaser, a mortgage industry consultant.

On Dec. 4, Fed Chairman Ben Bernanke proposed a variation on Bair’s plan that also draws in continuance the Treasury essence. Instead of guaranteeing losses, he said, Uncle Sam could subsidize reduced interest rates on modified loans. While greater amount of complex than the FDIC proposal, it would “increase the incentive of [mortgage] servicers to be aggressive in reducing monthly payments,” he said. With Geithner and Bernanke having worked closely throughout the crisis, the idea could gain over traction as Obama’s plans become clearer.