Senators reach deal on housing rescue: sources

By Patrick Rucker and Kevin Drawbaugh

WASHINGTON (Reuters) - Leaders of the Senate Banking Committee on Thursday reached a deal on a broad housing rescue plan in which Fannie Mae and Freddie Mac would support a federal mortgage insurance fund, two industry sources said.

Committee Chairman Christopher Dodd, a Connecticut Democrat, said an accord had not yet been finalized, but he told reporters after a meeting of the panel, "We're getting pretty close to it. ... We're down to a few issues."

Funding for the $300 billion mortgage insurance fund, to be run by the Federal Housing Administration, proved to be one of the biggest stumbling blocks during talks all week between Dodd and Sen. Richard Shelby, the committee's top Republican.

Developing a mechanism to fund the program was seen as key to getting the rescue plan out of the Banking Committee and to the Senate floor for final approval, although that could still be a distant prospect. Aides said Senate leaders are not yet engaged in the housing package debate.

Dodd and Shelby also agreed on language to create a new regulator for Fannie Mae and Freddie Mac, the government-sponsored enterprises that are the top two largest U.S. mortgage finance companies, the sources said.

Under the deal reached by Dodd and Shelby, Fannie Mae and Freddie Mac would direct money from a new affordable housing fund to backstop the mortgage insurance fund. The sources said that in the first year, 100 percent of their contributions would go to the new FHA program. That would fall to 75 percent in the second year and 50 percent in the third.

The formula was crafted by Sen. Jack Reed, a Democrat from Rhode Island, to satisfy Shelby, who objected to any taxpayer subsidy for the rescue plan, lobbyists said.

WHITE HOUSE DECLINES COMMENT

After temporarily adjourning a late afternoon committee meeting on the legislation and pledging to reconvene later in the evening, Dodd said, "We're in pretty good shape. Let's see what happens over the next few hours."

The White House has threatened to veto a similar rescue package passed last week by the House of Representatives, partly because of the cost to taxpayers. But the Bush administration has left open the door to discussions.

White House spokesman Scott Stanzel on Thursday said, "We're not commenting on any discussions we may or may not be having. If a bill comes to the president's desk it should meet the principles he has outlined."

The administration wants to ensure Fannie Mae and Freddie Mac face tougher oversight and want to see legislation retool the FHA with a system that sees riskier borrowers pay a higher mortgage insurance premium.

Both the Senate and House packages contain approaches to address those key White House goals. But both packages also propose setting up the FHA mortgage insurance fund, an idea that the administration dislikes.

"We're together on a good concept of the whole thing. We're working on language right now, so be patient," Shelby told reporters as he left a meeting in Dodd's office.

The Congressional Budget Office has said that the mortgage insurance plan would cost up to $2.7 billion. That would pay for expanding the FHA so it can help arrange lower-cost refinancing for as many as 500,000 homeowners whose homes have lost value since they took out their mortgages.