A key Senate Republican proposal aimed at the ailing U.S. housing market would direct Fannie Mae (FNM) and Freddie Mac (FRE) to buy up new discounted loans offered by mortgage lenders in a bid to stimulate demand to clear the backlog of properties and assist owners struggling to keep up with payments, aides said.

The plan would create a temporary window during which a federally subsidized rate of between 4% and 4.5% would be available to all qualifying borrowers, and homeowners looking to refinance.

Senate Republicans plan to introduce the idea as an amendment to the economic stimulus plan, which they say does little to tackle the root cause of the troubled U.S. economy - the housing market.

It would save the average prospective buyer and homeowner around $400 a month, Republican aides said, and would be capped at a cost to the Treasury of $300 billion.

The discounted loan would be for a 30-year term and available through 2010. It wouldn't be available on loans higher than $625,500.

Any creditworthy homeowner, or prospective buyer, regardless of how much they earn, could qualify for the lower loan rate.

Given that Fannie and Freddie are effectively owned by the taxpayer, the proposal would see the taxpayer subsidize the cost of the lower mortgages.

The housing proposal will form one of the main thrusts of the Republicans' attempts to modify the Democratic stimulus legislation. They argue that the nearly $890 billion package is bloated and doesn't do enough to immediately stimulate the economy.

Another Republican proposal would cut the two lowest federal income tax bands to 5% from 10% and to 10% from 15%. An aide to Minority Leader Mitch McConnell, R-Ky., said this credit would cost around $130 billion.

In order to pay for the proposed changes, Republicans plan to attempt to strip out many of the spending elements in the stimulus plan they argue will do little to stimulate the economy.

One of the measures in their sights is a tax credit aimed at Hollywood movie studios, which would allow them to write down 50% of their 2009 production equipment costs. Republicans say the credit would cost $246 million.

GOP lawmakers intend to offer several amendments throughout the week that will attempt to remove aspects of the bill they feel will be difficult for Democratic lawmakers to defend.

Republicans aren't alone in thinking there is spending that could be cut from the plan. Sen. Ben Nelson, D-Neb., said he was working with a group of several Democratic lawmakers to identify savings in the stimulus bill.

He said the group, which was cooperating with some Republicans as well, would bring an amendment forward to strip out "tens of billions" in spending and tax measures that wouldn't stimulate the economy.

"We're working to take out as much that's borderline stimulative as possible," Nelson said.

-By Corey Boles, Dow Jones Newswires; 202-862-6601; corey.boles@dowjones.com

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