WASHINGTON -- The federal government threw a lifeline to borrowers of failed thrift IndyMac Bancorp Inc., unveiling a plan to quickly modify thousands of mortgages to keep consumers in their homes and limit the government's potential losses from taking over the firm.

The Federal Deposit Insurance Corp. said the modification would combine interest-rate reductions, longer repayment periods and principal forbearance on first mortgages either held or securitized by IndyMac. The agency said it will send new loan terms to around 4,000 borrowers this week, with a target of about 25,000 offers in the coming weeks.

"Our goal is to get the greatest recovery possible on loans in default or in danger of default, while helping troubled borrowers remain in their homes," FDIC Chairman Sheila Bair said. The plan, she said, should "reduce future defaults, improve the value of the mortgages and cut servicing costs."

The FDIC was named conservator of IndyMac after federal regulators were forced to close the Pasadena, Calif., savings institution July 11 in one of the largest bank failures in U.S. history. Record foreclosures generally, and problems in the "Alt-A" mortgage market in which the firm specialized specifically, doomed IndyMac, which had been among the top 10 mortgage lenders in the U.S. before its downfall.

The plan announced Wednesday has two goals: keeping borrowers in their homes and increasing the value of IndyMac in the eyes of a potential buyer as the FDIC seeks to sell the bank and its assets. Materials provided by the FDIC make clear that the latter consideration will be paramount in its efforts to rework loans for borrowers.

Ms. Bair said the FDIC expects the program to increase the value of IndyMac's loan portfolio, potentially reducing the cost to the federal deposit-insurance fund when the bank's assets are sold. The FDIC has estimated that taking over IndyMac could cost the fund between $4 billion and $8 billion. Ms. Bair said by turning a portion of IndyMac's nonperforming mortgages into performing loans it "maximizes value for the deposit insurance fund."

More broadly, Ms. Bair said the FDIC hopes the program can serve as a model and catalyst for other mortgage lenders to do more to work with troubled borrowers. Ms. Bair has repeatedly urged mortgage servicers to work with borrowers to modify troubled loans, though she acknowledged that uncertainty about how mortgage investors would react to such changes has hampered private industry efforts.

The FDIC said eligible loans would be modified into loans with an interest rate capped at the current Freddie Mac survey rate for conforming mortgages, which stands at about 6.5%.

Additionally, the FDIC said it would waive all unpaid late charges, and there would be no fees or other charges for making the modification.

Write to Michael R. Crittenden at michael.crittenden@dowjones.com

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