Rep Frank to offer home-buying bill within weeks

WASHINGTON (Reuters) - A key House Democrat plans to introduce legislation in the coming weeks that would allow the U.S. government to buy homes whose values have dropped below the cost of the mortgage, an aide said on Thursday.

House Financial Services Committee Chairman Barney Frank wants to provide about $15 billion over the next five years to let the government buy homes after investors holding the pool of mortgages write down the value of the mortgage.

The plan would require a "federal entity," perhaps the U.S. mortgage insurance provider, the Federal Housing Administration, to buy owner-occupied primary residences and insure them against default.

The federal entity would determine that the borrower is able to repay the loan when it buys the mortgage from the lender.

He said mortgages provided to 2.2 million homeowners with poor credit history, known as subprime borrowers, and another 600,000 borrowers with good credit history, or Alt-A borrowers, are expected to face foreclosure as a result of the deteriorating U.S. housing market.

A summary of his committee's priorities predicted that the plan would help about 1 million distressed homeowners.

Frank insisted the proposal is not a bailout for investors because the plan would help borrowers stay in their homes and attempt to stem the drop in the value of nearby homes.

"I am not talking about the holders of the loans taking a haircut," the Massachusetts Democrat said. "I am talking about them having lobotomies."

Frank is also working on another plan to provide as much as $20 billion in grants and loans to buy foreclosed and abandoned homes at or below market value to stabilize home prices.

CRITIC WARNS OF WRONG INCENTIVES

The House committee's top Republican, Rep. Spencer Bachus of Alabama, warned against "legislative overreaction" that creates the wrong incentives.

Frank said Republican opposition would not deter him from moving forward with the plan.

"We're talking a lot with the administration," he said.

Frank did not dismiss a proposal being crafted by the Office of Thrift Supervision, but said he prefers his plan.

The OTS, which regulates mortgage lenders such as Countrywide Financial Corp and Washington Mutual Inc, would create "negative equity certificates" that could be publicly traded.

Being studied by the Treasury Department, it is intended to prod servicers to refinance distressed mortgages with the possibility of recouping some of the losses at a later date.

In addition, with the backing of the Bush administration, there are two industry-led loan modification plans under way. The plans, which are voluntary, would work on a case-by-case basis.

"The voluntary efforts are not accomplishing much," Frank said.

(Editing by Jan Paschal)