Senators say have deal on housing rescue bill

WASHINGTON (Reuters) - Leaders of the U.S. Senate Banking Committee said on Monday they had reached a deal on legislation to create a multibillion-dollar mortgage rescue fund and a new regulator for housing finance companies Fannie Mae and Freddie Mac.

The plan would enable the Federal Housing Administration to guarantee billions of dollars in refinanced mortgages for homeowners whose properties have fallen in value since they took out their loans.

"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," Democratic Sen. Christopher Dodd, the committee's chairman, said in a statement.

The rescue plan would give a federal guarantee to failing mortgages once the lender erased at least 15 percent of the original loan amount -- an offer that might appeal to mortgage investors who have seen foreclosures spike and home values sink over the past 12 months.

In the last week, Dodd and Sen. Richard Shelby, the panel's top Republican, have haggled over how to pay for the rescue plan. The bill that they agreed to, which is expected to clear the Senate Banking Committee on Tuesday, would have Fannie Mae and Freddie Mac cover the expected $500 million in failed loans under the program.

"This is a victory for the taxpayers, " Shelby, of Alabama, said on CNBC. "We're not funding this."

The U.S. House of Representatives approved a similar bill earlier this month that the nonpartisan Congressional Budget Office predicts would leave the government holding $1.7 billion in bad loans and help 500,000 struggling borrowers.

Dodd told reporters that his plan is more modest than the House bill but puts "a floor" under some sinking home loans. Once Fannie Mae and Freddie Mac help cover the costs of the rescue effort, Dodd said, they will help build a long-lasting fund to promote affordable housing nationwide.

If the bill clears the Banking Committee, Dodd said he hopes it will be reconciled with the House version and be signed by President George W. Bush by July 4.

While Bush has threatened to veto the House plan on the grounds it is too sweeping, a White House spokesman said that the president will consider the Senate plan.

"We look forward to seeing the details of the bill," spokesman Tony Fratto said.

NEW OVERSEER FOR FANNIE, FREDDIE

The legislation also takes on a thorny issue that has bedeviled policymakers and lawmakers for years: creating a stronger regulator for Fannie Mae and Freddie Mac.

The two government-sponsored enterprises are publicly traded but have federal mandates to nurture the national housing market. To critics, the companies' combined investment portfolios of nearly $1.4 trillion are dangerously bloated but Fannie Mae and Freddie Mac defenders say that the companies help keep mortgage costs low.

A draft of the bill, obtained by Reuters, appears to give the new regulator only limited powers to control the two companies' businesses, falling short of broader powers urged by critics of Fannie Mae and Freddie Mac that would enable the regulator to slash their investment holdings.

The companies' regulator should make sure their investments "are backed by sufficient capital and consistent with the mission and the safe and sound operations of the enterprises," the draft bill says.

Dodd said the new regulator would not have the authority to indefinitely control the mortgage finance companies' investments or their capital under the bill.

"It does not give this regulator the power to engage in systemic risk issues. ... Secondly, you cannot force (Fannie Mae and Freddie Mac) to raise capital for any reason whatsoever," the Connecticut Democrat told reporters.

(Additional reporting by Alister Bull; Editing by Leslie Adler, Gary Hill)