White House vows housing bill veto as Senate debates

WASHINGTON (Reuters) - The White House threatened to veto a major housing rescue bill on Thursday just as the U.S. Senate began debate on it, setting up a partisan fight over legislation that backers say could save hundreds of thousands of distressed homeowners from foreclosure.

With home prices falling and foreclosures on the rise, Democrats in Congress were pushing for aggressive federal action, with the support of some key Republicans. But other Republicans were raising objections and seeking delay.

Congressional leaders were trying to hammer out a final bill and send it to President George W. Bush before lawmakers leave town at the end of next week for the July 4 holiday.

At its heart, the legislation would create a $300 billion mortgage rescue fund that proponents say would have the government backstop 400,000 failing loans.

In a statement, the White House strongly objected to provisions of the bill that would send $4 billion in aid to communities hard-hit by foreclosures, faulted other spending plans and changes in how regulators could oversee housing programs.

"The federal government must not prolong necessary corrections in the housing market, bail out lenders, or subsidize irresponsible borrowing and lending," the White House said in a statement.

Tough talk from the White House has not dissuaded lawmakers from challenging the president in the past. In April, senators voted 84 to 12 in favor of a costly housing aid bill that Bush had opposed.

SPENDING FIGHT BREWS

The Senate's bill, headed for a vote within days, closely resembles one already passed by the House of Representatives that has also drawn a Bush administration veto threat.

Both bills would create a $300 billion mortgage insurance fund under the Federal Housing Administration that would help homeowners struggling with mortgages to refinance, if lenders agree to erase part of the original loans.

Paying for the fund is a point of contention between Democrats and Republicans, as is another provision in both bills that would channel federal grants and loans to state and local governments to buy and fix up foreclosed properties.

Both bills would also retool the government regulator that oversees Fannie Mae and Freddie Mac, the congressionally chartered companies that are the nation's largest sources of mortgage finance, as well as raising the limit on the size of mortgages that may be financed by the two and the FHA.

The White House said in a statement that if the Senate legislation were sent to Bush as now drafted, "his senior advisers would recommend that he veto this bill."

The White House said the provision on sending aid to state and local governments would mainly benefit private lenders instead of struggling homeowners.

New York Sen. Charles Schumer dismissed some Republicans' call to delay moving forward with the legislation because of controversies surrounding mortgage lender Countrywide Financial Corp.

Some critics have said the legislation would unduly benefit Countrywide. There have also been questions about whether two Democratic senators -- Connecticut's Christopher Dodd and North Dakota's Kent Conrad -- received special discounted mortgages when they financed properties with Countrywide.

Both lawmakers have said they did nothing wrong.

Two Republican senators -- South Carolina's Jim DeMint and Kentucky's Jim Bunning -- said they would try to block the housing legislation on the floor and asked for answers on "the amount that Countrywide Financial and other lenders stand to benefit from the taxpayer bailout for bad loans."

In remarks on the chamber floor, Senate Majority Leader Harry Reid said he hoped to work privately with Republican lawmakers to smooth out any of their objections.

Differences between the House and Senate bills would have to be worked out before a package could go to the White House.

(Additional reporting by Patrick Rucker and Karey Wutkowski; Editing by Leslie Adler)