Senate deal struck on mortgage aid

Plan would let government back loans for at-risk borrowers. Key lawmakers reach compromise: Taxpayers will not be on the hook if loans go bad.

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By Jeanne Sahadi, CNNMoney.com senior writer

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NEW YORK (CNNMoney.com) -- Senate Banking Committee leaders said Monday that they have come to a deal on a housing bill that would prevent foreclosures, create affordable housing and revamp oversight of two of the mortgage market's biggest players: Fannie Mae and Freddie Mac.

A major part of the legislation would allow the Federal Housing Administration to insure $300 billion in new loans for at-risk borrowers if lenders agree to write down loan balances below the appraised value of borrowers' homes.

The deal came as pressure has been building in Washington to respond to the huge increases in foreclosure filings. It was struck between the top Democrat and Republican on the Banking Committee: Chairman Christopher Dodd, D-Conn., and Ranking Member Richard Shelby, R-Ala.

"This legislation is good news for both the markets and homeowners," Dodd said in a statement. "The bill addresses the root of our current economic problems - the foreclosure crisis - by creating a voluntary initiative at no estimated cost to taxpayers which will help Americans keep their homes."

Dodd and Shelby had been in prolonged negotiations over the bill.

A key sticking point has been Shelby's push to shield taxpayers if borrowers default on their payments after getting government-backed loans. He has said that he wants the FHA plan funded by redirecting money that Dodd's original bill earmarked for a new affordable housing trust fund. The funds would be paid by Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500).

"My primary consideration ... has been to protect the American taxpayer, and I believe we've made significant progress toward that goal," Shelby said in a statement.

Dodd said Monday that the compromise bill would still create a fund to spur affordable housing but would use the funding for that program in the first year to backstop the FHA mortgage program.

The new FHA program could benefit an estimated 500,000 people. It could cost as much as $500 million, which would be paid for by Fannie and Freddie. If it turns out the costs fall below that level - that is, should few if any borrowers default on their new FHA loans - the funds from Fannie and Freddie would be redirected back to the affordable housing trust fund.

Regulating the big boys

Another big issue in the legislation is a measure that would provide for stricter oversight of Fannie and Freddie. The two government-sponsored enterprises guarantee the purchase and sale of home mortgages in the secondary market.

Shelby had been campaigning for more stringent safeguards than Dodd's original bill provided. Both Fannie and Freddie have experienced accounting scandals in the past and both saw steep first-quarter losses.

The Banking Committee is scheduled to debate and vote on the bill Tuesday. The measure is certain to pass at the committee level and Dodd said he is hopeful he can get the votes he needs to pass the bill through the full Senate in time to go to President Bush before the July 4 congressional recess.

It remains an open question whether Bush would support the bill. He has threatened to veto a similar bill sponsored by Rep. Barney Frank, D-Mass., and passed by the House on May 8 by a 266-154 vote. But Dodd said that while the White House hasn't endorsed his bill yet, "there's been some positive reaction out of the White House."

A spokesman for Frank said the congressman was pleased a compromise had been reached. "We look forward to working with them," he said.

- With additional reporting from CNN Producer Lesa Jansen To top of page

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