Under the proposal being pushed by the financial industry, the Treasury would seek to lower the rate on a 30-year mortgage to 4.5 percent by purchasing mortgage-backed securities from Fannie Mae and Freddie Mac. It’s unclear exactly how much the plan would cost.

Asked about the proposal during his testimony before a Senate Appropriations subcommittee, Neel Kashkari said that it was one of the options the administration had under review.

The Treasury is striving to use the “right tools for the right job” in an effort to help as many homeowners as possible, said Kashkari, the department official in charge of the US$700 billion rescue effort.

The goal of the industry’s proposal would be to take advantage of the unusually large difference, or spread, between mortgage rates and yields on government debt. On Thursday, the yield on the 10-year Treasury note yield sank to a record low of 2.56 percent, while the national average rate on 30-year fixed rate mortgages was 5.54 percent, according to financial publisher HSH Associates.

In recent years, there has been about a 1.8 percentage point difference between the yield on a 10-year Treasury note and a 30-year mortgage rate, but that spread currently hovers around 3 percentage points.

Analysts said the government could use its ability to borrow money at low rates to in essence flood the market for mortgage-backed securities. This increased demand would tend to push down the yield on mortgage securities sold by Fannie and Freddie, which now average about 5.5 percent because of investor concerns about default risks. Once those yields fall, the theory goes, lower mortgage rates should follow.

That would have two benefits for the economy: Immediately adding money to the pocketbooks of homeowners who can refinance their mortgages and reduce their monthly payments, and eventually help arrest the slide in home prices since much lower mortgage rates would allow more potential buyers to qualify for loans.

Kashkari said the administration believed it was critical that the US$700 billion rescue program maintain the flexibility and resources it needs to address new challenges as they arise.

Those goals were essential for the Bush administration’s remaining time in office, but also to leave the fund with the resources needed to meet challenges that will be faced by the incoming administration of President-elect Barack Obama, Kashkari said.