WASHINGTON (MarketWatch) - Using taxpayer funds to keep out-of-work homeowners in their homes until they find another job is an option being looked at by some officials in the Obama administration, according to people familiar with government financial rescue programs.

At issue is an administration program that is employing $50 billion in taxpayer funds from the $700 billion Troubled Asset Relief Program to help lenders modify mortgages for troubled homeowners.

Elizabeth Warren, chairwoman of the Congressional Oversight Panel, which is a TARP watchdog group, and a gaggle of Pennsylvania groups representing troubled homeowners, are pressing the Treasury Department to consider using some federal TARP funds from the modification program to give government bridge loans to people who have recently lost their jobs. The loans would not accrue interest until their income is restored.

The oversight panel argues in a recent report that the Treasury's current mortgage modification program focuses its attention on the problem evident early in the financial crisis of people having sub-prime mortgages they can't afford. Panel member Richard Neiman contends that the second wave of foreclosures is coming that is based more on loss of income and unemployment, as the crisis has emerged.

"The mortgage crisis may have begun with unaffordable sub-prime or exotic loans, but it has expanded to capture an increasing number of homeowners with traditional, prime loans as the recession lingers," said Neiman.

Job losses rose to 9.8% in September, driving the unemployment rate to a 26-year high of 9.8%. Since the recession began in December, 2007, 7.2 million jobs have been lost and the unemployment rate has doubled. A survey of 44 professional forecasters released by the National Association for Business Economics on Monday found that unemployment is expected to remain high in 2010.

How it works in Pennsylvania

The proposal to keep out-of-work homeowners in their homes, which was discussed at an oversight panel field hearing last month in Philadelphia, could be based on Pennsylvania's Homeowners' Emergency Mortgage Assistance Program.

With HEMAP, which was established in 1984, Pennsylvania state officials provide a two or three-year loan to a jobless homeowner, depending on the individual's finances and the economic situation. Using that program, homeowners are not responsible for repaying the vast majority of the principle or any of the interest on the loan until he or she finds a job.

Specifically, a struggling homeowner participating in the Pennsylvania program, which has depleted resources, requires jobless homeowners pay a token $25 a month until they get another job and their gross income surpasses 35% of their monthly housing costs, including mortgage and utility payments.

In some cases, when the household has some income, the payments would be made partly by the homeowner and partly by the state.

"What we're recommending to the administration is that they give people this loan until they get back to work," said John Dodds, director of the Philadelphia Unemployment Project. "If you don't deal with the people who lost their jobs, you are missing half of the problem and if these homes go into foreclosure it's bad for the broader economy and bad for neighborhoods, it's hard to recover."

According to people familiar with the Obama administration mortgage modification program, officials from the Housing and Urban Development agency have met with Pennsylvania officials responsible for the development of the HEMAP program to discuss whether the state program could be expanded nationally. The presentation was met with a positive response from the HUD officials, they said. A federal official familiar with the mortgage modification program said the meeting took place and "a range of options are being discussed to expand the mortgage modification program nationally."

Meanwhile, Neiman said he plans to discuss the HEMAP program with key Treasury officials as well as HUD Secretary Shaun Donovan. "I would propose that Treasury consider using TARP funds to fund existing or future state emergency mortgage assistance programs," Neiman said.

Treasury spokeswoman Meg Reilly said the department continues to study further ways to help unemployed homeowners. She added that the Treasury has taken "unprecedented steps" to help unemployed Americans, including the provision of 79 weeks of unemployment benefits, an additional $25 a week in benefits and a subsidy for COBRA health insurance.

She pointed out that the Treasury's $50 billion modification program, known as the Home Affordable Modification Program, or HAMP, is open to the unemployed.

However, Dodds argues that even though the HAMP program is open to the jobless, it is not being used effectively to help the unemployed.

"It's a real chaos with the mortgage companies trying to get HAMP going," Dodds said.

He adds that, unlike the HAMP program, a federal loan approach to the jobless could help a large number of people in a short period of time. It also solves the concerns of mortgage servicers who complain they will be sued by mortgage securities investors who argue that these lenders will file lawsuits against them for modifying mortgage payments, he said.

Irwin Trauss, attorney at the Philadelphia Legal Assistance Center, said the HEMAP program only provides loans to eligible unemployed, such as those who have lost their job through a layoff. He said the loans would be a critical bridge for individuals that lose their jobs and are seeking employment, until they find new jobs.

Trauss said he envisioned that the loan could be completed in conjunction with a HAMP modification or on its own.

Congressional legislation

If Treasury chooses not to proceed with a HEMAP-type program, legislation under consideration on Capitol Hill could institute it.

House Financial Services Committee Chairman Barney Frank, D-Mass., has proposed a plan to use $2 billion of money repaid by TARP bank bailout recipients to fund state programs that provide "emergency mortgage relief payments" for the recently jobless or other struggling homeowners. The $2 billion would go into an "Emergency Homeowners' Relief Fund," which would be used for that purpose. Read the legislation

On the other side of Capitol Hill, Senate Banking subcommittee on Securities and Investment Chairman Jack Reed, D-R.I., has introduced a similar bill that would allocate $6.5 billion to direct states to set up programs, including delayed interest loans, for troubled homeowners that are unemployed.

However, Dodds is hoping Treasury and HUD move forward on such a program right away rather than waiting for Congress to enact legislation. "By the time 50 states set up 50 programs, we could be too far along into the wave of foreclosures," Dodds said.