Under the plan, the department would offer to buy securities used to finance newly issued home loans but lenders would have to set extremely low interest rates to participate in the program, sources told The Washington Post. (NYSE:WPO)

The plan would use the Federal National Mortgage Association (OTCPK:FDRNP) and the Federal Home Loan Mortgage Corp. (OTCPK:FREJO) to encourage banks to lend at rates as low as 4.5 percent, more than 1 percentage point lower than current rates for a 30-year, fixed mortgage, The Wall Street Journal reported.

The cost of the plan, still in development, and a funding source remained undefined, the Post reported. One possibility is for the Treasury to raise money by issuing bonds at 3 percent interest, allowing the government to turn a profit since it would be buying securities that pay 4.5 percent.

Treasury officials told the Journal the plan could halt the skid in home prices by enabling qualified borrowers to afford bigger loans, which would increase demand and raise home values.

Borrowers would have to qualify for a loan guaranteed by Fannie Mae (NYSE:FNM), Freddie Mac (NYSE:FRE) or the Federal Housing Authority, officials said, so the government could steer clear of risky loans.

Treasury efforts to lower rates on new mortgages would be in conjunction with a Federal Reserve plan to buy $500 billion in existing mortgage-backed securities issued by Fannie Mae and Freddie Mac and $100 billion worth of mortgage giants' debt, the Post said.