Senate Democrats would consider a Republican proposal to create a discounted mortgage rate subsidized by the federal government as part of the debate over the economic stimulus package, Majority Leader Harry Reid, D-Nev., said Tuesday.

He said that Democratic senators had discussed the proposal during their policy luncheon, and that leadership would look at the idea to determine its effectiveness in helping the ailing U.S. housing market.

The proposal 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.

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.

Its cost would be capped at $300 billion, Republicans said. A senior aide to Reid said that Democrats' main concern of the plan was its possible cost.

Sen. John Ensign, R-Nev., said the plan could help up to 40 million Americans either buy a home or refinance their existing mortgage.

Republicans said they will introduce the plan 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.

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.

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.

Sen. Johnny Isakson, R-Ga., will propose an extension of a home-buyer credit to $15,000, or 10% of the purchase price, whichever is less. The current legislation waives the need to pay back a $7,500 credit on properties purchased by first time buyers between Jan 1. and the end of August.

The GOP alternative would open the credit up to all individuals buying a principal residence until the end of the year.

A Democratic amendment would retain the $7,500 cap, but also extend the repayment freeze on the credit until the end of the year.

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.

Ensign said there would be a series of further proposed tax cuts brought forward as amendments aimed primarily at helping small business owners.

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.

Reid said that Nelson could make details of his amendment public as soon as Wednesday evening.

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

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