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Four years after the housing bubble popped, 11 million homeowners owe more on their mortgages than their houses are worth.

On the theory that easing the debt burden for those underwater borrowers would boost consumer spending and lift the overall economy, the U.S. government is experimenting with a program to sell delinquent loans to investors at a discount that encourages them to lower the mortgage principal.

The Federal Housing Administration is auctioning thousands of defaulted mortgages at prices marked down by as much as 65 percent. If the pilot works as planned, the government mortgage insurer will cut its losses by avoiding foreclosures while giving borrowers a better chance of remaining in their homes.

"This pilot program is a potential win-win-win," Acting FHA Commissioner Carol Galante said in an e-mail.

Still, as the program joins other small-scale government housing initiatives, it illustrates the challenges policy makers face as they try to revive the housing market. So far, investors in the loans are scratch-and-dent specialists who buy less-than- perfect debt and try to squeeze a profit out of it. In the long run, they might have little interest in continuing to work to keep troubled borrowers from losing their homes.

In some cases, the investors are the same people who originated subprime loans in the run-up to the 2008 credit collapse or later ran afoul of regulators.

The FHA so far has acquired and sold about 2,500 loans on properties across the U.S. under the program, with a total unpaid principal balance of $446.8 million. More than a year into the project, most of the notes are still delinquent, according to data provided in a briefing by FHA officials.

Several Approaches
The program is one of several avenues being pursued by the regulators and President Barack Obama. One of those, the Home Affordable Refinance Program or HARP, is being expanded to include more borrowers. The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, said today it will allow qualified borrowers to refinance into current low interest rates no matter how underwater they are on their mortgages.

Like HARP, the FHA pilot program -- known as the Mortgage Acquisition and Disposition Initiative -- is aimed at the problem of underwater homeowners, who are at increased risk of walking away from their mortgages. Lenders and investors have been reluctant to take the losses associated with writing down principal even when it might prevent a costly foreclosure.

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