WASHINGTON (Reuters) - The U.S. House of Representatives on Thursday approved legislation to create a $300 billion mortgage-insurance fund and provide billions more in homeowner aid to stabilize a housing market shaken by a wave of foreclosures and a credit crunch.

Prospective buyers visit an open house in Alexandria, Virginia, April 6, 2008. The House of Representatives on Thursday approved a bill to create a $300 billion mortgage-insurance fund and provide billions more in homeowner aid to stabilize a housing market shaken by a wave of foreclosures. REUTERS/Jonathan Ernst

The string of bills written by Democrats, the most aggressive government effort to date to combat the nation’s housing woes, would give some first-time home buyers a $7,500 tax credit and send $15 billion to communities hit hard by the mortgage crisis to help them buy and fix abandoned homes.

The mortgage-insurance fund at the heart of the initiative would give the Federal Housing Administration fresh cash and a new mandate to refinance borrowers whose homes have dropped in value since they took out their mortgage.

Under the program, lenders would get an FHA guarantee on the loan if they wrote down the principal amount, an initiative that could help up to 500,000 borrowers.

The plan to retool the FHA passed 266 to 155 and notably drew the support of 39 Republicans, even though the measure faces a White House veto threat. The homebuyer tax credit measure was approved by a margin of 322 to 94.

CORRECTING EXCESSES

During a debate on Thursday, the key architect of the FHA plan said it would help correct excesses of an overheated housing market that for years saw Wall Street investors offer easy loan terms to risky borrowers.

“Clearly there has been market failure with regard to mortgages,” said Rep. Barney Frank, chairman of the House Financial Services Committee.

While the legislation aims to free up $300 billion for the FHA, the non-partisan Congressional Budget Office said the plan would affect no more than $85 billion in loans, in part because many mortgage investors would turn their backs on a program that requires them to record big losses.

A White House spokesman called the legislation “a taxpayer-funded bailout for lenders and speculators,” but the Bush administration supports some provisions and has left the door open for a compromise, even while promising a veto.

The House bill now goes to the Senate, which has yet to fully debate and vote on key elements in the House plan.

SENATE VOWS SIMILAR ACTION

The Senate Banking Committee is scheduled to begin drafting similar legislation to expand the FHA program on Tuesday. It is also due to take up a separate provision in the House bill that would create a new regulator for housing finance companies Fannie Mae and Freddie Mac.

“The passage of this bipartisan measure sends a clear signal to Americans -- and the White House -- that Congress is committed to helping people keep their homes and stabilize the markets,” Sen. Christopher Dodd, chairman of the Senate panel, said after the House vote.

The Bush administration argues that it can help many borrowers by tweaking the existing FHA program, without bailing out parties it sees as undeserving.

The plan to offer federal money to local governments passed on a narrower margin than the other provisions and could be more vulnerable to critics in the Senate and the White House.

A separate provision of the housing legislation would allow municipal bond issuers to use letters of credit from the Federal Home Loan Banks instead of bond insurance. In recent months, major bond insurance companies have been downgraded by credit ratings agencies, wreaking havoc in the market.