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Mortgage guarantee plan may be ready

Moves include Wednesday's drop in the Fed interest rate.

WASHINGTON The government is preparing to unveil a plan as soon as today guaranteeing about 3 million mortgages to struggling homeowners, officials said.

The Bush administration is considering using about $50 billion from the recently passed bailout of the financial industry to guarantee about $500 billion in mortgages. The plan could include loan modifications that would lower interest rates for a five-year period, according to two people briefed on the plan.

It would be the most aggressive effort yet to limit damages from the U.S. housing recession, which has shaken global credit markets.

The news followed a move Wednesday by the Federal Reserve to lower its benchmark by a half a percentage point Wednesday, its second rate cut this month. The stock markets seesawed after the announcement and closed slightly lower on a late wave of selling.

The rate-setting Federal Open Market Committee knocked down the federal-funds rate – the amount charged for overnight lending between banks – to 1 percent. In a tandem move, commercial banks lowered the prime rate by a half point to 4 percent.

The prime rate is what they charge their best customers.

The Fed also signaled a willingness to go further, even though it has never lowered its benchmark target rate below 1 percent, a level that almost would be tantamount to giving money away. Such a move could spark the economy, but also could invite bad lending because there's little cost to spending cheap money

The last time the fed funds rate was this low was a period from June 2003 to June 2004, and the low cost of borrowing money then helped create the housing bubble that led to today's collapse in housing prices.

Before that, the last time the rate stood so low was in 1958, during the second term of Dwight D. Eisenhower.

In both instances, rates didn't go still lower. But Wall Street is now rooting for even further cuts to the benchmark rate, lowering the cost of borrowing for businesses and consumers alike.

Besides cutting interest rates, the Fed announced it was extending credit lines worth $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore in an effort to bolster financial markets in those countries and relieve investors' anxieties.

It brought to 14 the number of central banks that the Fed has entered into so-called swap arrangements for currency as a way to pump more liquidity into global credit markets, part of an effort that the Bank of England estimated has resulted in $5 trillion in support being put forward by governments worldwide.

The International Monetary Fund unveiled a new lending process to get support to countries caught up in the credit crisis – another effort by the 185-member institution to show it was prepared to perform its job as lender of last resort to countries facing difficulties.

The Fed's deep cut in lending rates Wednesday was expected, in part because many economic indicators now point to a U.S. economy in recession. Confirmation could come as early as today, when the Commerce Department releases what are sure to be dismal third-quarter economic growth numbers that are expected to show a contraction.

More than 4 million American homeowners with a mortgage were at least one payment behind on their loans at the end of June, and 500,000 had started the foreclosure process, according to the most recent data from the Mortgage Bankers Association.

The mortgage-assistance program set to be announced today would be run by the Federal Deposit Insurance Corp. The agency's chairman, Sheila Bair, said last week she was working “closely and creatively” with the Treasury Department on such a plan, but revealed few details.

Andrew Gray, an FDIC spokesman, said it would be “premature to speculate about any final framework or parameters of a potential program.”

Treasury Department spokeswoman Jennifer Zuccarelli called details of the loan modification plan “simply inaccurate.” She said the Bush administration “is looking at ways to reduce foreclosures, and that process is ongoing,” but has not decided on a final approach.

McClatchy Newspapers, The Associated Press and The New York Times contributed.

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