The Senate Banking Committee approved legislation Tuesday that could save a half million homeowners from foreclosure and help stabilize the nation's rattled housing market.
Congress is trying to stem a wave of foreclosures estimated to hit about 1.4 million this year with home prices falling and many borrowers unable to make payments on costly mortgages taken out before the real estate bubble burst.
Under the Senate plan, lenders who agree to erase a large share of the original loan amount could win a government guarantee on future mortgage payments. Other provisions of the bill would create a stronger regulator for mortgage-finance companies Fannie Mae and Freddie Mac.
Both the Senate bill and a similar House bill call for creating a fund under the Federal Housing Administration to let thousands of distressed borrowers refinance into government-guaranteed loans.
The legislation would have the two government-sponsored enterprises cover a large share of the losses that the new fund is expected to absorb.
The committee passed the legislation on a vote of 19 to 2 after the top Democrat and Republican on the panel crafted a compromise that won broad bipartisan support.
Now, the legislation must pass the full Senate and then be reconciled with a similar plan that cleared the House earlier this month.
Democratic Sen. Christopher Dodd of Connecticut, chairman of the Senate panel, has said he hopes to see the mortgage rescue package reach President Bush by July 4.
The White House had threatened to veto the House bill, but has said it will take a close look at the version that cleared the Senate committee.
"I don't believe the president will veto this. I hope not," Sen. Richard Shelby of Alabama, the top Republican on the banking panel, told reporters after the vote.
Rep. Barney Frank, chairman of the House Financial Services Committee and author of the House-passed bill, said Tuesday he expects lawmakers will be able to hammer out a compromise between the two bills and deliver it to Bush.
The House version could guarantee up to $300 billion in refinanced mortgages and would assist about 500,000 borrowers at a cost to taxpayers of an estimated $1.7 billion.
The White House objected specifically to the cost of the FHA refinancing fund. Those objections were shared by Shelby.
After weeks of haggling, Shelby and Dodd agreed to scale down the FHA refinancing fund so its cost would be only about $500 million. Dodd said the bill would still help a similar number of homeowners as the House version.
Under the Senate bill, the cost would be covered by diverting money from an affordable housing trust fund to be set up under Fannie and Freddie .
Under the trust fund proposal, the two companies would contribute a share of their profits to create a pot of money for housing advocacy groups to expand affordable housing.
The affordable housing trust fund was a key element in the housing rescue package authored by Frank, who said he was concerned about the Senate plan to divert those funds.
"A fight is brewing on the affordable housing trust fund," the Massachusetts Democrat said. "That would be one of the most contentious issues between us ... So we will deal with that."
Freddie Mac's chief financial officer said the company is "generally supportive" of the housing rescue legislation. Buddy Piszel, speaking at a Lehman Brothers conference in London via Webcast, said however, that the overseer should maintain Freddie Mac's and Fannie Mae's funding flexibility as they are the main sources of stability in "the worst housing downturn anyone has ever seen."