I have 2-railed a number of Lionel/K-Line/MTH steamers. I am adept at a lathe, and taught my brother how to do this stuff commercially. It really is time consuming - I think he can still do it at maybe a bit more than $100/axle. I won't touch it for fear of turning my hobby into drudgery.
Here is what I would do - find a set of 2-rail drivers on the used market (Lobaugh Challenger or USH would be best, although you might find a set of Sunset drivers out there), machine a new frame, and mount the original rods, cylinders, etc. on the new frame.
A less expensive way is to sell the 3-rail model and buy a nice 3rd Rail model.
I will find a photo of my Lionel FEF for you.