By Patrick Rucker Tue May 20, 10:54 PM ET
WASHINGTON (Reuters) - The U.S. Senate Banking Committee approved legislation on Tuesday that could save a half million homeowners from foreclosure and help stabilize the nation's rattled housing market.
Under the plan, lenders who agree to erase a large share of the original loan amount could win a government guarantee on future mortgage payments. The bill would also create a stronger regulator for mortgage-finance companies Fannie Mae and Freddie Mac.
Both the Senate bill and a similar plan passed by the House of Representatives earlier this month would create a fund under the Federal Housing Administration to allow distressed homeowners to refinance into government-guaranteed loans.
Congress is trying to stem a wave of foreclosures estimated at about 1.4 million this year with home prices falling and many borrowers unable to make payments on costly mortgages taken out before the real estate bubble burst.
Senate Republicans and the White House had worried a new FHA program would put taxpayers on the hook for failing loans. But under the compromise bill passed by the Senate panel, Fannie Mae and Freddie Mac will absorb loan losses.
The bill that cleared the Senate committee on Tuesday now must go before the full Senate for a vote. If approved, lawmakers will need to hammer out a compromise between the competing House and Senate versions.
Rep. Barney Frank, chairman of the House Financial Services Committee and the author of the House legislation, said he had questions about how the Senate plan would fund mortgage rescues. But he said he expects lawmakers from both chambers to agree on a bill that can go to President George W. Bush.
Democratic Sen. Christopher Dodd of Connecticut, chairman of the Senate panel, has said he hopes to see the mortgage rescue package reach Bush by July 4.
While the White House had threatened to veto the House bill, it said it will take a close look at the Senate version.
"I don't believe the president will veto this," Sen. Richard Shelby of Alabama, the top Republican on the banking panel, told reporters after the vote.
The foreclosure prevention plan that cleared the House could assist about 500,000 borrowers at a cost to taxpayers of about $1.7 billion, according to the nonpartisan Congressional Budget Office.
The White House objected specifically to the cost of the House plan and Shelby demanded that its sponsors find a way to fund it without tapping governmen coffers.
After weeks of haggling, Shelby and Dodd agreed to scale back the FHA refinancing fund so it would cost only about $500 million. Dodd said the bill would still help a similar number of homeowners as the House version.
The Senate bill would cover the cost of the program by diverting money from an affordable housing trust fund to be set up under Fannie Mae and Freddie Mac.
Under the trust fund proposal, the two companies would contribute a share of their profits to create a pot of money for housing advocacy groups to expand affordable housing.
The affordable housing trust fund was a key element in the housing rescue package authored by Frank, who said he was concerned about the Senate plan to divert those funds.
"A fight is brewing on the affordable housing trust fund," the Massachusetts Democrat said. "That would be one of the most contentious issues between us ... So we will deal with that."
Freddie Mac's chief financial officer said the company is "generally supportive" of the legislation.
Speaking at a Lehman Brothers conference in London via Webcast, Buddy Piszel said, however, that the new regulator for Freddie Mac and Fannie Mae should maintain the companies' funding flexibility as they are the main sources of stability in "the worst housing downturn anyone has ever seen."
A spokesman for Fannie Mae said the company was concerned that the legislation might put a crimp in its ability to invest in the nation's housing market.
(Additional reporting by Kevin Drawbaugh in Washington and Lynn Adler in New York; Editing by Dan Grebler)