By Benton Ives, CQ Staff

Key Senate negotiators have reached an agreement on landmark legislation that would overhaul regulation of mortgage giants Fannie Mae and Freddie Mac and offer new help to struggling homeowners.

The measure, slated for markup Tuesday by the Senate Banking, Housing and Urban Affairs Committee, combines a new federal regulator with broad powers over Fannie and Freddie with a $300 billion expansion of the Federal Housing Administration’s insurance programs aimed at helping borrowers at risk of losing their homes to refinance their mortgages into more affordable loans.

“The bill addresses the root of our current economic problems – the foreclosure crisis – by creating a voluntary initiative at no estimated cost to taxpayers which will help Americans keep their homes,” said Christopher J. Dodd , D-Conn., chairman of the Senate committee.

Dodd worked out the compromise with the panel’s ranking Republican, Richard C. Shelby of Alabama, after weeks of intensive negotiations. The key was their agreement to shunt money from an affordable housing fund linked to Fannie and Freddie to cover the cost of the FHA expansion. The Congressional Budget Office has estimated the cost of insuring the new loans under a similar House-passed proposal (HR 3221) would reach about $1.7 billion over five years.

Shelby has long pushed for stronger oversight of Fannie and Freddie. But he has serious reservations about expanding FHA’s insurance program, fearing that it could bail out lenders and put taxpayer money at risk.

On Monday, Shelby said he was “pleased that the Hope for Homeowners proposal is paid for.”

“I’ve long said that we should do what we can to help struggling homeowners, short of asking the taxpayer to foot the bill,” Shelby added.

The White House has echoed many of Shelby’s concerns about the FHA program, while also calling for stronger oversight of Fannie and Freddie. The Bush administration issued a strongly-worded veto threat against a House-passed measure (HR 3221) that includes a similar FHA program.

But the White House seemed to soften its rhetoric on Monday, when spokesman Scott Stanzel said the compromise is “certainly something that we watch.”

“We don’t want to bail out lenders and speculators with tax dollars from hardworking Americans who pay their bills on time,” Stanzel said.

Low-income housing advocates are up in arms over the proposal to tap the affordable housing fund to finance the FHA refinancing effort. “That lenders who engaged in bad lending practices are going to get bailed out on the backs of the people who are too poor to afford even modest rents is inexcusable,” said Sheila Crowley, president of the National Low Income Housing Coalition.