The proposal called for creating a federal trust to buy or guarantee mortgages, enabling borrowers otherwise ineligible for refinancing to obtain new loans with terms of either 15 or 30 years at lower rates.

Legislative efforts to expand refinancing programs failed to gain traction last year, largely because of disagreements between Democrats and Republicans over whether those bills would include broader proposals for housing finance reform.

“It feels as though we’re finally at a point at which we could put one of these plans into motion, but I don’t think that it’s going to be legislative,” Isaac Boltansky, a policy analyst with Compass Point Research and Trading LLC said in an interview. “I just don’t see Republicans in the Senate moving on a refinancing bill unless there’s the ability to put amendments on the bill relating to housing.”

Treasury believes legislation creating a refinancing program would be the most effective way to help borrowers, Stegman said in his speech. Nonetheless, officials are preparing a backup plan, he said.

Investor Objections

Under that option, the government would pay the difference between the new and original interest rates to the owners of the loans for five years. Investors in private-label securities have sometimes objected to mortgage modifications because of concerns their income could be reduced.

Borrowers who are current on their mortgage payments and who owe at least 25 percent more than the value of their properties would be eligible for the program, which would reset their loans to the average fixed rate as determined by a weekly survey by Freddie Mac.

The extent of either the Treasury plan or a congressional solution would be limited, senior managing director Laurie Goodman of Amherst Securities Group LP said in a Jan. 22 note to clients. Goodman estimated that the proposal Merkley outlined in his paper last year would reach only 575,000 borrowers, while a Treasury rate modification plan would reach far fewer, about 150,000.

Another avenue for aiding borrowers would be through the use of a $7.6 billion Treasury fund to fight foreclosures in 18 states with the worst home-price declines. The Hardest Hit Fund, paid for with dollars from the Troubled Asset Relief Program, will be tapped by Oregon for its pilot program.

Oregon Program