Representative and Chairman of the House Financial Services Committee Barney Frank's proposal is scheduled for a vote next week before that panel, with consideration in the full House expected in early May.
Preliminary estimates from the nonpartisan Congressional Budget Office show that the program could cost the government about $3 billion to $6 billion. The office estimated the program could result in losses of 1% to 2% of the total amount as some borrowers default and the amount recovered in foreclosure is less than the principal outstanding.
Cost of the proposal is critical to lawmakers considering the bill. The estimate would help broaden support for the legislation from conservative Democrats or moderate Republicans who are concerned about the impact on taxpayers if the cost is seen as favorable.
The chairman of the Senate Banking Committee, Sen. Chris Dodd, is working on a similar bill, suggesting it has a lot of momentum, at least among Democrats. One question is whether such a plan would gain traction among Republicans in the closely divided Senate, or with the White House.
Many Republicans so far have been cool to the proposal because they said it would bail out, at taxpayers' expense, people who borrowed more than they could afford. In a hearing Wednesday, Sen. Richard Shelby of Alabama, the top Republican on the banking committee, suggested he had serious qualms about giving the government greater power to intervene in the mortgage market. "We must ensure that our actions do not reward, and thereby facilitate, imprudent financial decision making," he said.
To qualify, lenders would have to write down the principal on what are known as underwater loans -- loans that are worth more than the value an individual's home. Borrowers would then receive a new, more affordable government-backed loan from a lender approved by the Federal Housing Administration, a division of the Department of Housing and Urban Development, which would be used to pay off what remains of the original mortgage.
Rep. Frank's bill would direct the Federal Reserve to study whether an auction or bulk-refinancing mechanism is needed to refinance loans en masse. The move to call for a study, rather than require an auction, could help make his legislation more acceptable to the White House, which has objected to the idea.