White House threatens veto of FHA-rescue bill

Special Report

Seniors face grim choices amid market shock October pending home sales slip 1% Tenants victimized by foreclosures Taxpayers: Furious over homeowner bailouts

NEW YORK (CNNMoney.com) -- The House on Wednesday began debate on a housing package that would let the government back loans for homeowners at risk of foreclosure - a move many Republicans have opposed and which the White House has threatened to veto.

The centerpiece of the package is a proposal to let the Federal Housing Administration (FHA) insure up to $300 billion in new loans over four years if lenders agree to reduce the mortgage principal.

To qualify, the lender would have to cut the debt to no more than 85% of a home's appraised value. If the FHA-refinanced loans went into default, the FHA would pay the lender the remaining principal owed.

The bill is sponsored by House Financial Services Chairman Barney Frank, D-Mass.

While 1.4 million loans are likely to be eligible for such a program, the Congressional Budget Office estimates such a measure would end up insuring 500,000 borrowers and estimates doing so could cost $2.7 billion over 5 years, of which $1.7 billion could be a cost to taxpayers.

The package is expected to pass the Democrat-led House - with some help from Republican congressmen representing states hard hit by the housing crisis.

But the bill also includes elements intended to attract the support of Senate Republicans and the White House, both of whom have expressed concerns that Frank's FHA rescue plan could amount to bailing out lenders, borrowers and investors.

Nevertheless, late Tuesday, the White House issued a statement threatening to veto the bill in its current form.

The elements in the bill intended to draw Republican support are "modernizing" the FHA - for which both the House and Senate have already passed their own bills - and more stringent oversight of Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that guarantee the purchase and sale of home mortgages in the secondary market.

But the administration statement called the inclusion of FHA modernization and GSE reform "largely symbolic" and said Frank's FHA rescue plan "would force FHA and taxpayers to take on excessive risk, and jeopardize FHA's financial solvency."

Despite the veto threat, "the House will proceed today. It is too bad President Bush ignored the advice of [Federal Reserve] Chairman Bernanke and decided on right wing ideology over needed compassion and good economics," a spokesman for Frank said.

In a speech about the housing crisis on Monday evening, Bernanke did not explicitly endorse Frank's FHA proposal. But he said that for borrowers who meet certain debt-to-income ratios and own homes worth less than the mortgage debt owed on them, "the best solution may be a write-down of principal or other permanent modification of the loan by the servicer, perhaps combined with a refinancing by the Federal Housing Administration or another lender."

Meanwhile in the Senate, Banking Committee Chairman Chris Dodd, D-Conn. has been busy negotiating with Republicans about the parameters of an FHA refinancing plan and GSE reform.

The committee's ranking member, Sen. Richard Shelby, R-Ala., has repeatedly expressed resistance on both counts. Regarding the FHA backing high-risk loans, he has questioned the fairness of laying the risk of potential foreclosures at taxpayers' feet. The FHA is not supported by taxpayer money, but it could be if its revenue from borrower-paid premiums and fees is overwhelmed by a substantial number of defaults in the new FHA-backed refinanced loans.

Dodd said on Wednesday he is continuing to try to broker a bipartisan agreement and, according to Congress Daily, wants the Banking Committee to mark up legislation for an FHA rescue proposal and GSE reform next week.

Shelby's office, meanwhile, told CNN producer Lesa Jansen that discussions are ongoing but it remains to be seen if an agreement can be reached.

It's not clear yet what the administration's veto threat will ultimately mean for the prospects of lawmakers in the House and Senate finalizing a housing rescue package and sending it to the president's desk.

"We see this more as an effort to gain leverage over the final shape of the bill and less about an actual veto. The politics of killing this bill are negative for the Republicans, who very much need to win either Ohio or Florida if they hope to keep the White House in November. Both of those states are suffering severely during the housing mess," said Jaret Seiberg, senior vice president at the Stanford Group, a Washington policy research firm.

In an interview with the Associated Press, Treasury Secretary Henry Paulson said the administration would continue negotiating with Congress. "I view my job as to work to get something that is acceptable and that the president can sign. That is what we always should be doing. We are working to get a housing bill that the president can sign, and I'm going to work to that end."