Now, mortgage finance companies Fannie Mae and Freddie Mac will have to refinance up to 125 percent of a home's value. The current loan-to-value cap is 105 percent.

Before the end of the five-year housing boom in 2006, Fannie Mae and Freddie Mac would finance no more than 80 percent of a home's value. Since the companies were effectively nationalized in September, officials have pushed the firms to cover mortgages with higher loan-to-value ratios.

"By expanding refinance eligibility, we can bring relief to more struggling homeowners more quickly," said Treasury Secretary Timothy Geithner in a statement.

Falling housing prices have caused more and more homeowners to be "underwater," that is, they owe more money than their house is actually worth.

According to Standard & Poor's/Case Shiller home price index, home values in many markets have sunk by 18 percent in the last 12 months.

The revamped refinance program expands a housing rescue plan first developed by the Treasury Department in February that was meant to lower the costs of homeownership for borrowers who are making their payments on time.