by Calculated Risk on 5/08/2008 06:30:00 PM

From CNN: House OKs controversial housing plan

In a 266-154 vote ... lawmakers approved a proposal ... to let the Federal Housing Administration (FHA) insure up to $300 billion in new loans over four years if lenders agree to reduce the mortgage principal.

To qualify, the lender would have to cut the debt to no more than 85% of a home's current appraised value. If the FHA-refinanced loans went into default, the FHA would pay the 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 is a voluntary program on the part of lenders, and the 85% LTV is of the current appraised value.