The Obama administration on Wednesday unveiled the U.S. government's most aggressive attempt yet to deal with the foreclosure crisis, pledging billions of dollars in new programs to help seven million to nine million borrowers.

The ambitious proposal would address the housing crisis on a variety of fronts -- helping millions of borrowers refinance into more affordable loans, preventing at-risk or "underwater" borrowers from falling behind on payments, and taking advantage of government control of Fannie Mae (FNM) and Freddie Mac (FRE) to stabilize house prices and provide much-needed liquidity.

It will also include enticements to encourage both borrowers and lenders to work to prevent foreclosures, including payments to reduce the principals on loans and bonuses for mortgage firms that successfully rework mortgages.

Obama, who will formally introduce the plan in remarks in Phoenix later Wednesday, will say that the government cannot fail to address a housing crisis that has brought down the broader economy.

"In the end, all of us are paying a price for this home mortgage crisis," Obama will say, according to a copy of his remarks. "And all of us will pay an even steeper price if we allow this crisis to deepen - a crisis which is unraveling homeownership, the middle class and the American Dream itself."

The centerpiece of the program is a plan to let four million to five million homeowners currently unable to refinance their loans because of falling home prices do so using Fannie Mae and Freddie Mac. It would be limited to borrowers who took out a conforming loan owned or guaranteed by one of the two government-sponsored enterprises, and would allow them to refinance even if they owe more than 80% on the value of their homes.

"For many families, a low-cost refinancing could reduce mortgage payments by thousands of dollars per year," according to background documents released by the Treasury Department.

That proposal will be coupled with a $75 billion "homeowner stability initiative" that includes standardized industry guidelines for modifying loans, new requirements for firms that receive government rescue funds, and allowing bankruptcy judges to rework the terms of some loans.

This second proposal will focus on reaching borrowers who are not yet in the foreclosure process or who are underwater, meaning they owe more on their loan than the value of their house. The three-year plan will be restricted to borrowers who live in their homes, and who have loans within the Fannie Mae and Freddie Mac conforming loan limits.

The goal would be to reduce monthly mortgage payments by having lenders reduce the interest rate on mortgages so that the payment is no more than 38% of a borrowers income. At that point, the Treasury will match dollar-for-dollar any further interest rate reductions until a 31% debt-to-income ratio is reached. The new payments would then be kept in place for five years.

Lenders would also have the option of reducing a borrower's principal to lower the monthly payments, with Treasury sharing the partial costs of any reduction. The financial services industry has generally shied away from reducing borrowers' principal in the various voluntary efforts that have been conceived over the last two years.

To encourage loan-modification efforts, which to this point have been underwhelming, the government would provide servicers with various incentives. Firms would receive an up-front fee of $1,000 for each eligible modification, and could then earn an additional $3,000 in annual bonus payments for successful modifications. Mortgage investors would also be eligible for a $1,500 payment, and mortgage servicers $500, for working with borrowers who have not yet fallen behind on their loans.

Likewise, to encourage borrowers to stay current on their payments, the $75 billion program would include money to provide up to $5,000 over five years to borrowers who stay current. The money would be targeted at reducing the principal on borrowers' mortgages.

The Obama administration was quick to address concerns that the plan could be exploited by homeowners who took risky bets on the housing market. Obama said the proposal is focused on those who "played by the rules"; People whose traditional mortgages are "underwater" will be eligible for refinanced loans, while people with sub-prime mortgages will be able to modify their loans.

"I also want to be very clear about what this plan will not do: It will not rescue the unscrupulous or irresponsible by throwing good taxpayer money after bad loans," Obama said.

Obama said that any financial firms receiving, or hoping to receive, taxpayer financial assistance through the $700 billion Troubled Asset Relief Program would have to agree to modify their loan books along the guidelines established in the housing proposals.

-By Michael R. Crittenden and Henry J. Pulizzi, Dow Jones Newswires; 202-862-9256; henry.pulizzi@dowjones.com