Housing rescue stokes partisan split

Sens. Dodd (left) and Shelby are leading the debate over a foreclosure relief bill.

Watching over Fannie and Freddie

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NEW YORK (CNNMoney.com) -- The momentum behind congressional efforts to let the government offer more aid to struggling homeowners has hit stiff resistance.

The Senate Banking Committee is scheduled to debate and possibly vote Thursday on a housing bill sponsored by Committee Chairman Christopher Dodd, D-Conn.

The Senate proposal has been propelled by mounting concern about foreclosures. But its prospects have turned murky as some Republican senators have come out against the bill.

The wild-card: it's an election year. Republicans who hail from states with big subprime problems could be on the hot seat with constituents if the housing picture doesn't improve and Congress lets the bill die.

The full Senate is not expected to address the housing issue before early June.

Dodd's bill would let the Federal Housing Administration back mortgages of at-risk borrowers if lenders voluntarily write them down to an affordable level, a proposal similar to one passed by the House last week.

Republicans have said the plan amounts to a bailout that would put taxpayer dollars at risk and help lenders and borrowers who took imprudent risks.

Democrats counter by saying that the cost of the FHA plan - the House's version is estimated at $1.7 billion - is not a big price to pay considering that the Federal Reserve is backing JPMorgan Chase's purchase of Bear Stearns with $29 billion to curb systemic risk on Wall Street. They also contend that the point of the FHA proposal is not just to help individual homeowners but to prevent a rash of foreclosures in financially hurting communities, where home values and property taxes are already taking a hit.

And presumptive Republican presidential nominee John McCain has proposed an FHA rescue plan that is similar in parts to Dodd's proposal.

Regulating Fannie and Freddie

Another sticking point in the negotiations over Dodd's bill is a measure that would provide for stricter oversight of the two biggest players in the mortgage market - Fannie Mae and Freddie Mac. The two government-sponsored enterprises guarantee the purchase and sale of home mortgages in the secondary market. Both have experienced accounting scandals in the past and both saw steep first-quarter losses.

Key Republicans, such as the Banking Committee's ranking member, Richard Shelby, R-Ala., have been campaigning for more stringent safeguards than Dodd's bill provides. In particular, Shelby wants the agencies to hold a bigger financial cushion in reserve to protect them during housing market downturns and to allow their regulator more latitude in changing those capital requirements as the regulator sees fit.

"I just think that the capital today is so thin, considering the losses, that it is dangerous," Shelby said in an interview with the Financial Times this week.

He also wants a lower cap on the dollar amount and the types of mortgage securities the agencies are allowed to hold in their mortgage portfolios, said Brian Gardner, a political analyst with Keefe, Bruyette and Woods.

Both Fannie and Freddie have said in the past week that they are raising $6 billion and $5.5 billion in new capital, respectively. Those moves have somewhat allayed their regulator, the Office of Federal Housing Enterprise Oversight, which said Wednesday it would reduce the amount of surplus capital it would require the agencies to hold.

The agencies' efforts to increase capital may do little to weaken critics' opposition to the measure, however. "I don't think it changes anyone's mind on the Hill," Gardner said.

The push for votes

To be sure, the Democrats' slim 51-49 majority in the Senate darkens the political outlook for Dodd's bill.

But some political analysts believe Republicans from states hard hit by the housing crisis will face a mighty election year wind to vote in favor of more federal housing help.

The Stanford Group, a Washington policy research firm, counts 23 Republican senators who come from states with at least one county seriously hurt by subprime problems. Of those, two are from Ohio and Florida, swing states in the election; and the terms of 8 senators in the group will expire this year.

"Even if a senator is not seeking re-election - as several Republicans are not - he is likely to face added pressure to support a housing bill to deprive the Democratic opponent from using the vote against the GOP nominee," wrote Jaret Seiberg, a Stanford analyst, in a research note.

There's less pressure on the 10 Senate Banking Committee Republicans. Only three of them come from states with at least one county seriously hurt by subprime problems.

Dodd can get his bill passed with or without them - he only needs a party-line vote to get something out of committee. But if he only gets Democrats to vote for it, Gardner said, the bill will be in serious trouble on the Senate floor. That's because for Democrats to defeat any threat of a filibuster, they will need 60 votes, which means they'll need at least 9 Republicans to get on board with the Dodd bill.

Right now, Gardner doesn't expect Dodd to get more than one or two votes among Banking Committee Republicans. "That allows him to fight another day," he said.

Lawmakers are under pressure to act quickly. They have little more than 5 legislative weeks left before they break for the July 4 recess. After that, political analysts say, the focus will shift solely to the elections and most legislative business will grind to a halt.