Paulson:Can work with House FHA bill

By Patrick Rucker

WASHINGTON (Reuters) - U.S. Treasury Secretary Henry Paulson said on Thursday he likes parts of a plan backed by Democratic lawmakers to expand a federal mortgage guarantee program and can envision a compromise taking shape.

At issue is a bill that would expand the Federal Housing Administration program so it can catch troubled loans headed toward foreclosure once the lender has erased some of the loan amount.

"We are behind the objectives. We like some parts of it better than others and we have not issued a veto threat," Paulson said in an interview with Reuters, referring to legislation sponsored by Rep. Barney Frank, chairman of the U.S. House of Representatives' Financial Services Committee and a Massachusetts Democrat.

Paulson also said he was "cautiously optimistic" that lawmakers and the Bush administration will hammer out legislation to create a new regulator for Fannie Mae and Freddie Mac, the congressionally chartered housing finance companies.

Last week, Paulson sat down with the Democratic and Republican leaders of the Senate Banking Committee and the top executives from Fannie and Freddie to discuss regulatory reform legislation.

"It was a good meeting," Paulson said. "There continues to be positive momentum and activity after that meeting."

A month ago Paulson helped broker a deal that allows Fannie Mae and Freddie Mac to expand their mortgage holdings, helping a housing finance sector constricted by a wave of failing loans. In exchange for greater investment freedom, the two companies agreed to raise more capital.

For years, the Bush administration has warned that mortgage assets are dangerously concentrated in Fannie Mae and Freddie Mac's roughly $1.4 trillion investment portfolios. Still, Paulson has said the current mortgage crisis calls for extraordinary measures and that compromise is a watchword as policy-makers try to stabilize the housing sector.