Election year calculus underlies housing bill

By Kevin Drawbaugh - Analysis

WASHINGTON (Reuters) - The biggest housing market rescue plan yet seen from the U.S. government has won House of Representatives approval, but faces resistance in the Senate, a White House veto threat, and questions about whether it will work.

Defying the Bush administration and their own leaders, dozens of House Republicans joined Democrats on Thursday to support the plan, reflecting a desire to be seen helping homeowners ahead of November's elections.

The plan goes next to the more closely divided Senate, where the same election-year calculus will determine whether Democrats can gather enough votes to proceed with the bill.

"It's politically dangerous to oppose this (bill)," said Douglas Elmendorf, an economist at the Brookings Institution think tank. "There are a lot of negative forces still at work in the economy... The idea that we're maybe out of the woods is a mistake."

The centerpiece of the bill is a two-year program for the Federal Housing Administration (FHA) to offer $300 billion in new loan guarantees to help refinance distressed mortgages.

To participate, lenders would have to agree to forgive portions of troubled loans, while borrowers would have to meet certain indebtedness standards and pledge they did not intentionally default on a loan to obtain assistance.

The White House has vowed to veto the bill, despite its inclusion of two major provisions backed by President George W. Bush and tacit support voiced this week for another section by Federal Reserve Chairman Ben Bernanke.

The bill was put together by Democratic Rep. Barney Frank of Massachusetts.

Bush said the bill would "reward speculators and lenders," while Republicans loyal to him threw delaying tactics at the legislation on the House floor and criticized it as a bailout.

Even if Republicans change their tune later and cut a deal on the bill in the Senate, some Wall Street analysts said the sweeping House bill is riddled with uncertainties.

"I'm really skeptical," said Rod Dubitsky, a senior strategist in the asset-backed securities group at financial group Credit Suisse. "The Frank plan, and any FHA solution, depends on a number of moving parts."

Brian Gardner, vice president at investment firm Keefe Bruyette & Woods, said housing markets have stabilized somewhat recently, but mostly due to moves by the Federal Reserve, not the prospect of House legislation.

FHA AT CENTER

A Congressional Budget Office study estimated that 500,000 borrowers could be helped under such an FHA expansion.

"If that's the number, then it will have some kind of impact," Gardner said, adding participation by lenders would be strictly voluntary.