updated 8:53 p.m. ET Nov. 3, 2008

WASHINGTON - The government expects only 20,000 troubled borrowers will apply to refinance into more affordable home loans by next fall under a new mortgage aid program passed by lawmakers over the summer.

The $300 billion 'Hope for Homeowners' program was launched Oct. 1. Designed by lawmakers eager to respond to the mortgage crisis, the Congressional Budget Office had projected it would let 400,000 troubled homeowners swap risky loans for conventional 30-year fixed rate loans with lower rates.

But the early results are discouraging: the government received only 42 applications in the program's first two weeks, according to the Federal Housing Administration. The low turnout was first reported by the industry newsletter Housing Wire. Since the applications take about 60 days to process, no loans have been approved yet.

Steve O'Halloran, spokesman for the Department of Housing and Urban Development, called the projection of nearly 20,000 borrowers "an extremely preliminary estimate of early applications for a program that is barely a month old. Borrowers and lenders are continuing to sign up."

Since the program requires lenders to voluntarily reduce the value of a loan and take a loss, it's unclear how many lenders will participate. In addition, the program may be unattractive to some borrowers because those who sell their properties must agree to share some of their profits with the government.

"It just reinforces that none of the federal efforts to date seem to be getting the job done," said mortgage industry consultant Howard Glaser, a former housing official in the Clinton administration. "There's just no question that when a new president and Congress come back to town, they're going to take much more aggressive intervention."

To participate, homeowners can try to persuade their existing lender to join the program, but the decision is ultimately up to the lender. The banking industry appears likely to favor options that don't require an immediate reduction in principal, such as deferring payments, allowing partial payments and lowering the interest rate.

"We've said from the start that it would be a tool that would be used after other loss mitigation programs and opportunities would be exhausted," said John Courson, chief operating officer of the Mortgage Bankers Association.

Hope For Homeowners is limited to borrowers who are spending more than 31 percent of their income on mortgage payments. Loans made after Jan. 1 of this year are excluded.

Brian Brady, managing director of mortgage banking and brokerage firm World Wide Credit Corp. in San Diego, said the industry could well accelerate its use of the program in the coming months. Many in the industry "are probably just waiting to see how it works ... Mortgage banking is a monkey-see, monkey-do business. Everybody waits for someone to do it first."

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There is broad agreement on using the FHA to help struggling homeowners refinance into mortgages they can afford. And the Bush administration has broadened the agency's authority under a program it calls FHASecure.

Over the next year about 770,000 borrowers were expected to use that program, though only 14,700, or fewer than 1 percent, were likely to be delinquent on their mortgages.

Meanwhile, consumer advocates and the banking industry alike have been eagerly awaiting an announcement of an ambitious plan to help around 3 million borrowers avoid foreclosure, though it remained uncertain whether the Bush administration would do so.

"The question on the table is, do we need to do more to help homeowners? If that answer is yes, then there's a lot of other issues that have to be analyzed," White House press secretary Dana Perino said Monday.

Still, many believed the Bush administration would eventually act, as foreclosures continue to skyrocket. "I think they finally get it," said John Taylor, president of the National Community Reinvestment Coalition, a consumer group in Washington.

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