After the federal bailout of mortgage giants Fannie Mae and Freddie Mac, the government is planning to buy billions worth of troubled mortgages along with other illiquid assets from banks to avoid a financial meltdown.

According to the government plan, the Treasury Department will buy illiquid assets—assets that cannot be easily converted to cash—from banks to stabilize the financial market. These include toxic mortgages or bad housing loans that caused a cave in in the housing market, which over time, contributed to the collapse of prominent banks.

When banks have a lot of bad loans in their hands, it basically means that they are holding liabilities instead of assets. These ‘assets’ are not worth much because they don’t hold enough value—they can’t be turned to cash (or liquidated) without difficulty. Simply put, these institutions don’t have enough money they can use to make loans. This is the reason why some banks are making it difficult for borrowers to get a mortgage.

The government sees the need to take the financial burden off troubled banks. Once the $700 billion budget gets approved, the government will try to buy bad mortgages at discount prices from banks so that they can resume making more loans and help jumpstart the recovery of the housing market. This would make it easier for you to get more affordable mortgages and buy a house in the future. You could also get help with loan modification and a possible reduction in interest rate on your loan balance.

The federal rescue could also revive investor confidence in the financial market. As a matter of fact, the stock market improved after plans for the government rescue was announced.

Treasury Secretary Henry Paulson is working on getting the plan approved by Congress as soon as possible.