UPDATE 1-US mortgage bailout plan sparks debate on tax onus

(Recasts, adds Frank, Bachus comments)

By Patrick Rucker

WASHINGTON, April 24 (Reuters) - A U.S. House of Representatives panel on Thursday outlined a new federal program that could buy $300 billion in troubled home loans to forestall a wave of potential foreclosures, sparking a debate on the potential burden on U.S. taxpayers.

The plan, conceived by Rep. Barney Frank, chairman of the House Financial Services Committee, would give the Federal Housing Authority fresh funds and a new directive to catch home loans headed for foreclosure.

As outlined, the bill would allow the FHA to insure $300 billion of home loans. But loans representing up to 2 percent of that amount are expected to fail, according to a memo produced by Frank's office that cites research from the non-partisan Congressional Budget Office.

The bill would allow the FHA to insure and guarantee refinanced mortgages that have been significantly written down by mortgage holders and lenders.

Under the program, lenders would erase some of the original loan amount and could even loosen loan terms in order to win the government backstop.

"What we hope to do today is to diminish the cascade of foreclosures," Frank said. "We're not trying to stop the sliding house prices."

Frank, a Massachusetts Democrat, said the plan takes every effort to ensure that taxpayer dollars do not pay for irresponsible borrowers and said the FHA would still foreclose upon homes where borrowers cannot make refinanced payments.

The Bush administration opposes Frank's sweeping plan to expand the FHA and has pitched its own plan to retool the largest government-backed homebuyer aid program.

The Federal Housing Administration was created during the Great Depression of the 1930s to give low-income families help buying a home. Borrowers who use the program can win a cheaper loan because the FHA guarantees monthly payments.

Since Democrats hold a majority on the panel, Frank's version of legislation is likely to pass largely intact, although members said they will try to add their own provisions to the bill during Thursday's debate.

Spencer Bachus, the leading Republican on the panel, on Thursday said Frank's proposal is a "creative attempt" to address declining home prices and rising foreclosures while trying to minimize taxpayer cost. But Bachus, of Alabama, said the bill is fundamentally unfair.

"It will require American taxpayers to assume risks incurred imprudently by mortgage lenders and now over-extended borrowers during the run-up in housing prices earlier this decade," he said.

Bachus on Thursday introduced a substitute bill that he has said he would advocate for a modest liberalization of the FHA meant to help current borrowers transition into more sustainable loans.

The substitute bill, which was opposed on Thursday by a committee voice vote, also addressed reform of housing finance companies Fannie Mae and Freddie Mac.