Mortgage rescue advances in Senate

The Senate Banking Committee voted 19-2 to pass a bill to limit foreclosures, create affordable housing and revamp oversight of two of the mortgage market's biggest players: Fannie Mae and Freddie Mac.

"Many thought we couldn't do this - that it would be a partisan exercise. I hope we've avoided that; I believe we have," said Banking Committee Chairman Christopher Dodd, D-Conn.

The pressure has been building in Washington to respond to the huge increases in foreclosure filings. Dodd said he hopes to get the bill approved by the full Senate soon and to President Bush for enactment by early July.

The legislation is the result of weeks of heated negotiations between Dodd and the committee's top Republican, Ranking Member Richard Shelby, R-Ala.

A key measure in the bill would allow the Federal Housing Administration to insure $300 billion in new loans for at-risk borrowers if lenders agree to write down loan balances below the appraised value of borrowers' homes.

"The passage of this bipartisan legislation marks tremendous progress in my ongoing effort to help stabilize our markets and provide relief to hundreds of thousands of Americans," said Dodd.

A sticking point had been Shelby's push to shield taxpayers if borrowers default on their payments after getting government-backed loans. He wanted the FHA plan funded by redirecting money that Dodd's original bill earmarked for a new affordable housing trust fund. The funds would be paid by Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500).

"My primary concern in negotiations has been to protect the taxpayer," Shelby said.

The compromise bill will still create a fund to spur affordable housing but would use the funding for that program in the first year to backstop the FHA mortgage program.

How the FHA plan would work

Dodd's FHA plan is similar in structure to one sponsored by Rep. Barney Frank, D-Mass., and passed by the House on May 8 in a 266-154 vote. One key difference, Dodd's FHA plan would be in effect through 2011 and Frank's would go through 2012. Dodd's plan would also not go into effect until Oct. 1.