The President also called on the FHFA to streamline the refinancing process for GSE borrowers including eliminating appraisal costs for all borrowers.

The proposal has already been panned by critics as "dead on arrival."

Observers say the plan is unlikely to get Congressional approval as Republicans are unlikely to support a bank tax and are against further government intervention in housing.

On the flip side, key electoral battleground states in Florida, Nevada and Arizona have been worst affected by the housing bust, making policies directed at underwater borrowers a key issue heading into the Presidential elections.

"While the government cannot fix the housing market on its own, the President believes that responsible homeowners should not have to sit and wait for the market to hit bottom to get relief when there are measures at hand that can make a meaningful difference, including allowing these homeowners to save thousands of dollars by refinancing at today's low interest rates," the White House said in a statement.

Shares of the biggest mortgage originators including Bank of America ( BAC), JPMorgan Chase ( JPM) and Wells Fargo ( WFC) were gaining 3.9%, 1.4% and 3% respectively in afternoon trading.

Wells Fargo is expected to benefit most from a refinancing wave as it has maintained share in the mortgage origination market while Bank of America and JPMorgan have trimmed their presence.

--Written by Shanthi Bharatwaj in New York

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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