House panel passes sweeping mortgage aid bill

WASHINGTON (Reuters) - The House of Representatives Financial Services Committee on Thursday approved a sweeping bill to enable the government to finance $300 billion in distressed mortgages with the aim of helping 2 million homeowners.

The legislation, approved by a 46-21 vote, would provide an infusion of capital and new mandate for the Federal Housing Administration to guarantee home loans when a property has sunk in value since the mortgage was written.

Lenders would have to erase a portion of the original loan in order to secure a government guarantee on future payments.

The plan would "put liquidity back in the market and not interfere with the market, I think, but help restore (it)," committee Chairman Barney Frank told reporters after the vote.

The committee's action sends the bill to the full House, which is expected to vote on it next week. A Senate panel is to begin drafting a companion measure on Tuesday.

Declining home values and rising foreclosures over the past 12 months have darkened the mood of consumers and pushed the economy toward recession. This week, separate reports showed consumer confidence was at a five-year low in April, while home prices took a record drop in February.

The new FHA program, according to Frank, a Massachusetts Democrat, could cost the federal government up to $6 billion, but save 2 million homeowners from foreclosure.

Democrats, who hold the majority in the House, have said they want to debate several housing measures next week.

The Bush administration opposes the bill, which it has said would put taxpayers on the line for big losses if a large share of FHA loans fail, but Frank has reason to be hopeful that a deal can get done.

His measure was endorsed by 10 Republicans on the Financial Services Committee, and other conservative lawmakers have signaled that they are willing to break party ranks in order to pass foreclosure prevention measures. In addition, Treasury Secretary Henry Paulson has said he sees some merit in the proposal.

Legislation with bipartisan support often gains the momentum needed to overcome obstacles on Capitol Hill and pressure could grow for action as the housing market continues to drag on the national economy.

A political showdown is likely between proponents of Frank's approach and supporters of the administration who say his approach is too costly and cumbersome.

In a full day of debate on Wednesday, Republican lawmakers tried but failed to narrow the scope of Frank's bill.

Rep. Tom Price, Republican of Georgia, said in a statement that the Frank bill represents "a dangerous bailout ideology ... (that) asks already-stretched taxpayers to insure the riskiest mortgages in the marketplace."

Brian Montgomery, the FHA chief, has told lawmakers that he can achieve many of the same goals of Frank's legislation with some simple and straightforward tailoring of the existing program rules.

Under Frank's plan, the homeowner and federal government would both reap a windfall if home prices increased in the first years after the FHA finances a loan. Mortgage investors, though, would be cut out of home price gains.

A banking regulator, mortgage trade group and Republican lawmakers could not convince Frank to give mortgage investors an ongoing stake in the refinanced home as a way to coax more lenders into the voluntary program.

John Taylor, president of the National Community Reinvestment Coalition, said Frank was right to leave mortgage investors out of the program because they spurred the runaway housing market that is now suffering from a slump.

"The mortgage industry generated many of these loans that were too expensive or even predatory," the consumer advocacy chief said. "There is a moral hazard if this bill were to reward that bad behavior."

(Editing by Leslie Adler)