UPDATE 2-Tax credits, FHA in US Senate housing bill-leaders

(Adds Reid, McConnell comments, background)

By Kevin Drawbaugh and Patrick Rucker

WASHINGTON, April 2 (Reuters) - Homeowner tax credits and a bigger role in the mortgage market for the Federal Housing Administration are among the items in a U.S. Senate housing bill agreed in principle by Democrats and Republicans, Senate leaders said on Wednesday.

Lawmakers were trying to finish a draft bill that could also provide a tax break to home builders and make billions of additional dollars available to help struggling homeowners refinance their mortgages, Senate aides said.

"This package addresses the core issues of this crisis, including foreclosure mitigation, mortgage counseling, FHA modernization and homeowner tax credits, among other provisions," said Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell, a Kentucky Republican.

Details were still sketchy as senators continued crafting the measure. Reid, a Nevada Democrat, said a draft bipartisan bill was expected to be unveiled by 1700 EDT (2100 GMT).

Congress is under pressure to help homeowners hit by a widening mortgage crisis and its fallout, including a wave of foreclosures and a global credit squeeze, which appear to be dragging the U.S. economy into a recession.

Once a bill is unveiled, it is expected to go to the Senate floor for debate and amendments, with a possible final vote by Congress' upper chamber at the end of the week. If adopted, the bill would then go to the House of Representatives.

The draft Senate bill was expected to include a tax credit to buyers of homes in or near foreclosure, although this item might be pared down from the $15,000, three-year credit originally proposed by Sen. Johnny Isakson, a Georgia Republican, a mortgage industry lobbyist said.

Since late last year, senior lawmakers have tried to hammer out new Federal Housing Administration standards.

One contentious question was how large a loan the federal agency could finance and how much of a stake borrowers would be expected to offer as a downpayment.

Mortgage industry lobbyists familiar with the Senate negotiations expect the new FHA loan limit to be $550,000 with a 3-1/2 percent equity stake from the borrower.

Excluded from the compromise Senate bill is a controversial bankruptcy law provision, put forward by Illinois Democratic Sen. Richard Durbin, that would allow bankruptcy judges to change the terms of some mortgages, said a senior Senate aide.

The Durbin provision will likely be offered as an amendment on the floor, requiring an up or down vote by the Senate.

HOME BUILDERS WOULD BENEFIT

Eventual winners, if the bill becomes law as expected, likely will include home builders and other industries hit by the housing slump, said Jaret Seiberg, policy analyst at Stanford Group Co, a financial advisory firm in Washington.

Both Democrats and Republicans favor extending a tax break that would allow companies to credit losses from the past two years against taxes paid over the prior years.

Extending the "net operating loss carry back" provision "would benefit home builders, financial firms, and other companies which have suffered losses that exceed their prior two years of earnings," Seiberg said.

But the Laborers' International Union of North America criticized the measure, labeling it a "handout for corporate home builders who helped cause the housing crash."

Aides and analysts said there is wide support for expanding by $10 billion the ability of states to issue tax-free bonds to help troubled borrowers refinance their mortgages.

Other measures with bipartisan backing include putting as much as $100 million more in federal money into counseling for troubled borrowers; requiring clearer language in home loan paperwork; and funding purchase and repair of distressed properties by local governments.

Republicans generally oppose Durbin's bankruptcy provision, which in limited cases would allow judges to revise the terms of a mortgage on a primary residence for a homeowner in bankruptcy. This is now prohibited, although a bankruptcy court judge may now revise the terms of a loan for a vacation home, a farm, a ranch or a boat in bankruptcy cases.

Durbin's provision would allow mortgage changes only for a primary residence and only for borrowers unable to afford their current mortgage. It would also be limited to mortgages already in place at the time the bill becomes law. Judges would be restricted on how much they could reduce the interest rate and how long they could extend the life of the loan.

The banking industry is lobbying to block the Durbin provision, arguing that it intrudes on contract law and it would drive up mortgage rates. (Additional reporting by Patrick Rucker)