The House on Thursday passed a contentious foreclosure-prevention package, which still faces a veto threat from the White House and an uncertain fate in the Senate.  In a 266-154 vote - with 39 Republicans voting in favor - lawmakers approved a proposal, to let the FHA insure up to $300 billion in new loans over four years if FHA lenders agree to reduce the mortgage principal.

To qualify, the FHA mortgage lender would have to cut the debt to no more than 85% of a home’s current appraised value. If the FHA refinance loans went into default, the FHA would pay the home loan lender the remaining principal owed.

While 1.4 million loans are likely to be eligible for such a program, the Congressional Budget Office estimates such a measure would end up insuring 500,000 borrowers. The CBO estimates the FHA expansion program would cost taxpayers $1.7 billion. “This bill is very time limited and limited in specifics to a subset of mortgages and meant to mitigate a market failure,” Frank said during the floor debate on Thursday.

Opponents of the FHA expansion contend it’s a bailout for lenders, investors and “speculators” who took on imprudent risk. And because participation in the program would be voluntary on the part of lenders, critics contend lenders would only unload their riskiest loans into the federally backed program.

Supporters note that the program is limited to loans for owner-occupied residents, not speculators. They also make the case that lenders and investors would be taking a loss on every loan, and that the borrower would be paying higher-than-usual premiums to the FHA to insure the loan and would share equity in their home with the government. “No borrower who goes through this process will say at the end of it, ‘Boy, that was fun. Where do I buy a ticket to get back on Space Mountain?” Frank said.

Supporters also say if the borrower still can’t afford the loan when it’s written down to 85% of appraised value, their loan won’t qualify for the program. If the bill is a bailout for anyone, they say, it’s a bailout for communities across the country, which suffer when home values and property taxes go down because of foreclosures.

Speaker Nancy Pelosi issued the following statement today in response to comments by President Bush after he met with House Republican leaders at the White House this morning: “American families confronting foreclosure deserve better from the President than a veto threat; they deserve the House’s bipartisan housing plan that will protect the American Dream of home ownership.

“The President should work with Congress so that we can speed relief to Americans facing foreclosure and help them keep their homes. The bipartisan plan has been endorsed by leading economists because it is a comprehensive solution to the mortgage lending crisis and is essential for our economic recovery. “Only moments after falsely accusing Congress of inaction, the President signed bipartisan legislation passed by the New Direction Congress that will help keep college loans affordable and will sign other bipartisan priorities that will become law because the he set aside partisanship and worked with Democrats to make progress for America. We urge him to do so again and work with Congress to keep people in their homes and stabilize the housing market.”

Experts Agree: Comprehensive Housing Crisis Legislation Is Needed for American Economic Recovery Recent remarks from leading economists make it clear that the FHA Housing Stabilization and Homeownership Retention Act that the House will consider today as part of a comprehensive housing package has all of the right elements to address our housing crisis and help avert a deeper decline in the overall economy.

Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve System – “High rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets, and the broader economy. Doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers. It’s in everybody’s interest.”

“…when the source of the problem is a decline of the value of the home well below the mortgage’s principal balance, the best solution may be a write-down of principal or other permanent modification of the loan by the servicer, perhaps combined with a refinancing by the Federal Housing Administration or another lender. To be effective, such programs must be tightly targeted to borrowers at the highest risk of foreclosure… Finding the right balance — particularly the need to avoid programs that give borrowers who can make their payments an incentive to default — is difficult. But realistic public- and private-sector policies must take into account the fact that traditional foreclosure avoidance strategies may not always work well in the current environment.”

Larry Summers, Charles W. Eliot University Professor at Harvard University, former United States Secretary of the Treasury  – “I think all of those present agreed on the importance of passing through the House of Representatives and ultimately though the Congress the legislation in which Congressman Frank has played a leading roll to support the housing finance system and in particular to provide for the avoidance of foreclosures with a substantially expanded FHA role. We believe that it is of great importance that, that legislation be passed as rapidly as possible.” For more info  http://www.speaker.gov