Senate Panel Approves Housing Bill
FHA Would Insure Loans for 500,000 Troubled Borrowers

By Lori Montgomery
Washington Post Staff Writer
Wednesday, May 21, 2008

A plan to rescue hundreds of thousands of homeowners at risk of foreclosure cleared a major political hurdle yesterday, improving the chances of an election-year effort to address the nation's housing crisis.

The Senate Banking Committee voted 19 to 2 to approve the bill, with every Republican except Jim Bunning (Ky.) and Mike Enzi (Wyo.) voting with the Democratic majority.

The vote clears the way for Senate approval of the plan, which is likely to come soon after the Memorial Day break. It also raises hopes that President Bush will sign the measure. The White House threatened to veto a similar bill that passed the House this month, citing the potential cost to taxpayers. Yesterday, White House officials were more encouraging.

The legislation would authorize the Federal Housing Administration to help at-risk borrowers trade exotic mortgages with escalating monthly payments for more affordable loans backed by the federal government. It would also create a new, stricter regulator with broad power to control the finances of the mortgage giants Fannie Mae and Freddie Mac . And it would dedicate a portion of their profit -- about $500 million a year -- to a new fund for low-income rental housing, the first significant federal commitment in decades.

Under a deal struck between Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) and Richard C. Shelby (Ala.), the panel's ranking Republican, part of the low-income-housing money would be diverted for three years to cover the cost of the FHA program. Senate Republicans had refused to support further government intervention in the housing market unless taxpayers were protected.

"This shows today what we can do if we work together," Shelby told reporters. He said he expects the Senate to approve the measure with "a big, big vote," adding: "I believe the White House will support this."

White House spokeswoman Dana Perino called Shelby's statement premature but said the White House is "hopeful that we'll be able to get to that point."

Before the legislation reaches the president, the Senate will have to reconcile differences with the House-passed bill championed by Financial Services Committee Chairman Barney Frank (D-Mass.). Frank said yesterday that he is concerned about diverting the low-income-housing money, which his bill would dedicate in the first year to New Orleans and other areas ravaged by Hurricane Katrina. Frank and Sen. Charles E. Schumer (D-N.Y.) also plan to press for higher limits on loans Fannie Mae and Freddie Mac can buy so that more borrowers in states like theirs, with higher housing costs, could qualify for lower interest rates. Still, Frank hailed the committee vote as a "big breakthrough" and said his staff will begin conferring with Senate aides.

"We can find ways to pay for this without taking the money away from New Orleans," Frank said. "We are in agreement on a whole lot of things." He said he hopes to be able to send the bill to Bush by early July.

Fannie Mae and Freddie Mac are not completely happy with the Senate bill but are not expected to mount a big lobbying effort to change it. Housing advocates are disappointed with the diversion of funds but plan to support the bill.

The proposal marks Washington's most ambitious response to the nation's housing crisis, which has so far thrown more than 1.5 million homeowners into foreclosure. Home prices have fallen by more than 10 percent, leaving many borrowers both unable to make their mortgage payments and unable to sell or refinance because they owe the banks more than their homes are worth.

The Bush administration has taken steps to help troubled borrowers by relaxing eligibility standards for FHA loans. Since September, 200,000 borrowers have received FHA refinancing, but only about 3,000 missed mortgage payments, prompting criticism that the FHA is not reaching those most in danger of losing their homes.

Dodd and other Democrats want to relax FHA eligibility standards further, authorizing the agency to insure mortgages for even the least creditworthy borrowers if lenders will forgive a portion of their debt and issue new, smaller loans with lower monthly payments. The government would not hold the mortgages but would agree to pay off lenders if borrowers default.

Borrowers and lenders would both pay high fees to the FHA, and borrowers who sell or refinance would have to share at least half of any profit with the government.

In its analysis of the House bill, the Congressional Budget Office said that 500,000 homeowners are likely to benefit from the program, with more than a third likely to default at a cost to taxpayers of $1.7 billion over five years.

The Senate bill aims to help the same number of borrowers at a lower cost, committee aides said. Unlike the House bill, it would not permit borrowers who sell or refinance to deduct fees paid to the FHA when they calculate profit to be shared with the government.

The Senate bill requires slightly less sacrifice from lenders. Both bills would require banks to forgive enough of the outstanding principal to reduce the new loan to 90 percent of a home's current value. The House bill would add 5 percent in fees, the Senate bill 3 percent.

Shelby and Dodd spent weeks negotiating but reached an impasse last week, with Shelby insisting that taxpayers should not subsidize irresponsible borrowers. The breakthrough came Thursday, when Sen. Jack Reed (D-R.I.) proposed using the low-income-housing fund to pay for the FHA program.

Staff writer Jeffrey H. Birnbaum contributed to this report.