Mortgage aid plan sees role for Fannie, Freddie

By Patrick Rucker

WASHINGTON (Reuters) - Fannie Mae <FNM.N> and Freddie Mac <FRE.N> would have to meet new goals to invest in troubled loans and erase some mortgage debt for borrowers facing foreclosure under legislation contemplated by a leading Democratic lawmaker.

The two biggest sources of U.S. mortgage financing would be required to buy troubled loans that had undergone a reduction in their principal amount and could be forced to hold larger reserves against those loans going bad, according to the summary of a bill being drafted by Senator Christopher Dodd, chairman of the Senate Banking Committee.

Those provisions are part of a broader proposal that would expand the Federal Housing Administration and let it siphon troubled home loans out of the housing finance system.

The FHA is the nation's largest home-buyer assistance program. It was conceived to help borrowers win better loan terms by guaranteeing regular payments. The Depression-era initiative meant to give first-time home buyers a boost has lately been seen as a tool to save today's borrowers from foreclosure.

Supporters of the plan expect mortgage investors will agree to write off part of the troubled loans if it means the federal government will take them off their books.

According to a summary of the bill, the write-down amount would be determined by a special advisory board and the government would finance no more than 90 percent of the new loan amount.

SHARING THE NEW EQUITY

In order to discourage capable borrowers from taking advantage of a write-down, the federal government and the borrower would share in any future home price appreciation.

"The borrower must share the newly created equity and future appreciation equally with FHA," the memo states. "This obligation will continue until the borrower sells the home or refinances the FHA-insured mortgage."

Mortgage servicers who pushed their loans through the new program would be shielded from lawsuits from disgruntled investors, according to the plan that imagines using $20 billion in government money to refinance approximately $400 billion in troubled mortgages.

Dodd's counterpart in the U.S. House of Representatives, Rep. Barney Frank, has his own plan to expand the FHA. The two lawmakers, both Democrats, would have to hammer out differences between their two bills if they were ever to shepherd them through each chamber.

Dodd, who is from Connecticut, and Frank, who represents Massachusetts, are expected to take up the issue in earnest when lawmakers return Monday after an Easter break.

Republican lawmakers are expected to express misgivings about the plan and the potential liability for taxpayers.

(Reporting by Patrick Rucker, Editing by Jan Paschal)