The chairman of the Senate Banking, Housing and Urban Affairs Committee on Friday praised the Federal Reserve’s response to the current credit crunch, but said the Bush administration is not doing enough to prevent serious harm to homeowners and the broader U.S. economy.

Sen. Christopher J. Dodd, D-Conn. who met for about 35 minutes with Fed Chairman Ben Bernanke and Treasury Secretary Henry M. Paulson Jr., said Bernanke had assured him the central bank would use “all tools” available to deal with the current crisis. But Paulson, he said, made clear that the administration remains opposed to lifting limits on portfolio assets held by mortgage finance giants Fannie Mae and Freddie Mac.

“It’s important to be vigilant, but also it’s time to act,” Dodd said. He urged the White House to allow the regulatory agency that supervises the giant government-sponsored enterprises to lift the cap on the amount of mortgage debt they can buy. “Liquidity is tremendously important, obviously,” Dodd said.

He also criticized statements that Paulson made earlier in the day in an interview with CNBC, in which the Treasury secretary said the current crisis would take a while to run its course, but that “we are going to work though this problem just fine.” Dodd jumped on those comments, which came before the two met Tuesday morning, when asked about the administration’s response.

“I’m concerned that you’re getting a dual message that this will take a long time to work out but that everything is hunky-dory,” Dodd said. “I’m disappointed that the administration is reluctant to act.”

Dodd said he was “not opposed” to passing legislation to raise the conforming loan limit, currently set at $417,000, on the size of mortgages that Fannie Mae and Freddie Mac can purchase. Many would-be homebuyers around the country — particularly in high-cost areas — are finding it difficult and costly to obtain mortgages in excess of that amount.

But legislative action would take weeks, if not months, and Dodd said the current situation is too volatile to wait. Lifting the portfolio limits for conforming loans, a step that does not require legislation, would get more liquidity into the housing market faster, he argued.

“This would have a positive effect on dampening down interest rate hikes within the conforming loan limits,” he said. But he said that Paulson “indicated they were not likely to move in that direction.”

Treasury officials and staff have argued that raising the caps would have little impact on the more troubled areas of the mortgage market because Fannie Mae and Freddie Mac are not allowed to purchase non-conforming loans. But a Dodd staff member said that argument ignores the fact that allowing the firms to buy up more conforming loans would inject billions of dollars of much-needed liquidity into the market that could then be used by lenders to staunch the credit crisis.

Dodd said the three men agreed on the need to encourage lenders to loosen their purse strings. The Fed on Aug. 17 cut the discount rate, the interest rate the central bank charges on loans to banks, to 5.75 percent from 6.25 percent. “The Fed has made available through the discount window cheaper products, and we urge the banks to take advantage of that opportunity,” he said.

The Fed has not yet reduced the more widely known federal funds rate, which currently stands at 5.25 percent, but has suggested in a statement it could do so if market conditions further deteriorate.

Dodd said he did not specifically ask Bernanke about the federal funds rate, out of respect for the Fed’s independence. But he said the Fed chairman responded “absolutely” when asked whether he was prepared to use “all tools” available to ease credit conditions.

Dodd called for aggressive steps by the administration to limit foreclosures, which he said have reached a 37-year high.

He expressed particular concern about homeowners who took out adjustable rate mortgages between 2004 and 2006 and now face “resets” to higher interest rates that could push their monthly payments from as little as $400 a month to as much as $1500 a month

“We have as many as 1 million to 3 million people who could lose their homes,” he said. “I urge every possible step to be taken here to make it possible for people to stay in their homes.”

Dodd noted that the Senate version of the fiscal 2008 Transportation-HUD appropriations bill (HR 3074, S 1789), would provide $100 million to housing counseling programs run through HUD. Those programs use non-profit agencies for individual counseling with borrowers in trouble with their subprime loans. The counselors work as mediators with lenders and help create work-out programs and refinance mortgage loans.

Additionally, Dodd pledged to use an overhaul of the Federal Housing Administration (HR 1852) to help address the fallout in the mortgage market when his committee returns in September.

That legislation is one of a number of measures aimed at addressing the current market crisis that lawmakers could take up when they return from the August recess. A bill (S 1299) sponsored by Sen. Charles E. Schumer, D-N.Y., that would impose a fiduciary responsibility — and thus legal liability — on mortgage brokers and lenders to adequately assess a consumer’s ability to repay a loan before it is made.

Lenders would have to verify “the reasonable ability of the borrower to pay the principal and interest on the loan, and any real estate taxes and homeowners insurance fees and premiums.”

In the case of adjustable rate mortgages, which are responsible for much of the stress now developing in the market, lenders and mortgage brokers would have to determine the ability of a borrower to pay based on the maximum possible monthly payment that could be due during the first seven years of the loan term.

The Schumer bill, which is intended to crack down on abusive lending, could also be fast-tracked if market conditions continue to deteriorate as many housing experts expect.