Senate negotiators reached what they called an “agreement in principle” Wednesday on a broad bipartisan package to address the nation’s housing crisis.

Tax breaks for home buyers and home builders and a major overhaul of the Federal Housing Administration’s mortgage insurance program are included in the legislation, but a contentious bankruptcy provision appears to have been jettisoned.

Christopher J. Dodd, D-Conn., chairman of the Senate Banking, Housing and Urban Affairs Committee, and the panel’s ranking Republican, Richard C. Shelby of Alabama, worked overnight to craft a bipartisan substitute for a Democratic housing bill (S 2636) that Majority Leader Harry Reid, D-Nev., introduced Feb. 13.

“This is a solid, bipartisan start to keeping families facing foreclosure in their homes, helping other families avoid foreclosures in the future, and helping communities already harmed by foreclosure to recover,” said Reid and Minority Leader Mitch McConnell, R-Ky., in a joint statement. “This package addresses the core issues of this crisis, including foreclosure mitigation, mortgage counseling, FHA modernization and homeowner tax credits, among other provisions.”

Amendments will be permitted on the floor — some of which could be contentious. But the leaders have not yet announced the guidelines for the amendment process.

Before the Senate can act, it first must formally call up a House-passed tax measure (HR 3221) that will serve as the vehicle for the housing package.

The Bush administration and many lawmakers have long sought an overhaul of the Federal Housing Administration, a Depression-era agency that provides government insurance for mortgages up to certain limits. Legislation passed by the House and Senate (HR 1852, S 2338) could enable the agency to help more borrowers refinance their mortgages into FHA-backed loans, which typically carry lower interest rates.

In recent weeks, House-Senate negotiators have struggled to reconcile differences over the maximum loan amount that FHA could insure and whether FHA-insured mortgages should continue to require at least modest down payments.

The Senate bill, which was more in line with the Bush administration’s initial plans, would have allowed the FHA to insure loans of up to $417,000 in high-cost areas. The limit is currently $362,000, far below the amounts that many borrowers need.

The House version sought to boost the limit to more than $700,000 in certain circumstances. It also would have given the Housing and Urban Development (HUD) secretary authority to raise the limit on different categories of loans by as much as $100,000 “if market conditions warrant.”

Industry sources on Wednesday said lawmakers had agreed on a $550,000 loan limit while maintaining a 3 percent down payment requirement, the same as existing law.

Differences over down payment requirements had also helped stall the bill’s progress. The Senate bill sought to reduce the minimum from 3 percent of the appraised value of a home to 1.5 percent. The House bill would have allowed zero-down-payment loans under certain circumstances.

But Republicans balked at lowering the down payment requirement, saying studies have shown borrowers with little or no money of their own invested in a home are more likely to default.

Rep. Spencer Bachus, R-Ala., ranking GOP member of the House Financial Services Committee, said, “The one issue Sen. Shelby and I insisted on is that we don’t have the 1.5 percent down payment or the zero down payment.”

House Financial Services Chairman Barney Frank, D-Mass., said lawmakers who had been involved in the FHA overhaul “were not closely involved in this,” but added, “I was kept informed on what was going on with this.”

He expressed support for the $550,000 limit for FHA-insured mortgages, saying, “It’s obviously a lot better than $417,000 and it’s within range.”

But he cautioned, “We haven’t agreed to it. There are a couple of other things that we need to talk about with the Senate.”

The bipartisan substitute included a number of tax provisions.

The legislation would establish a standard property tax deduction for homeowners who do not filed itemized income tax returns, according to a joint statement by Senate Finance Committee Chairman Max Baucus, D-Mont., and the committee’s ranking Republican, Sen. Charles E. Grassley of Iowa.

The standard deduction would be $500 for single filers and $1,000 for joint filers. Under current law, only taxpayers who itemize their deductions can deduct state and local property taxes from their income.

It also would expand tax breaks for money-losing homebuilders and other businesses, allowing companies with net operating losses in 2008 or 2009 to use those to offset profits from four prior years and receive applicable tax refunds. The current so-called net operating loss carryback limit is two years.

The package would allow a $7,000 tax credit over two years for the purchase of homes in foreclosure.

The total cost of the tax provisions, including the extra $10 billion on bond authority, comes to $10.8 billion over 10 years, according to the summary. Based on the summary, the package does not appear to include revenue-raising offsets.

“These tax provisions will keep property values up, keep folks in their homes, and keep businesses afloat, and those are all keys to handling the housing crisis,” Baucus said in a statement.

The package also includes $100 million for expanded counseling for borrowers at risk of default and $4 billion in Community Development Block Grants to purchase and rehabilitate foreclosed properties.

Dodd and Shelby were assigned Tuesday to hammer out a consensus bill to serve as the basis for floor debate. The Senate failed Feb. 28 to invoke cloture and limit debate on the Democratic version of the bill. With Republicans insisting on having a voice in the legislation, Reid and McConnell agreed Tuesday to ask Dodd and Shelby to come up with a bipartisan version.

Controversial changes that Democrats want to make in the bankruptcy code are likely to become floor amendments, not part of the core package. Majority Whip Richard J. Durbin, D-Ill., and Reid want to allow bankruptcy judges to modify the terms of existing subprime and non-traditional loans.

The lending industry, along with many Republicans and the White House, oppose the bankruptcy changes, saying it would increase borrowing costs for everyone because banks would charge more to offset the risk that their loans could be changed in the future.

It remains to be seen whether the bankruptcy proposal, and any other contentious amendments, will require a simple majority or a 60-vote supermajority to be approved.

Republicans hope to set a 60-vote threshold for approving amendments, which would make it difficult for the Durbin language to win adoption.

Even as the Senate prepares for its housing debate, House Democrats were moving forward with other legislative proposals to help struggling borrowers.

Frank’s committee plans hearings next week on draft legislation to allow the FHA to insure some refinanced mortgages if lenders reduce the outstanding principal and adjust the terms so borrowers can pay. That could cost lenders, but it also would sharply limit their risk.

Democratic leadership aides said they expect a broad package or series of housing measures to move quickly if the Senate passes its legislation.

Frank said of the Senate package, “I’m encouraged that it’s moving forward. ... I hope that this agreement to break a logjam in the Senate is a model for other deals.”

But House Minority Whip Roy Blunt, R-Mo., said he hadn’t seen details of the Senate housing bill, and he warned against passing something that could do more harm than good.

“Our members don’t want to do anything to make the home mortgage market more difficult,’’ he said. “That’s the likely result of legislation that’s not well thought-out.’’

Blunt said House Republicans haven’t decided if they will introduce their own bill. “We’ll see what happens in the next 48 hours. We’re not going to solve this week,’’ he said. House GOP leaders are in daily contact with the White House on the mortgage issue.

House Republican Conference Chairman Adam H. Putnam, R-Fla., said he feared that any legislative solution could backfire by penalizing homeowners who pay their mortgages on time or responsible would-be borrowers who could find it harder to get a loan. “There’s a real danger here of over-reaction, of drying up credit for people who need the real estate market to return so they can get out from under or buy the house of their dreams,” Putnam said.

Blunt, who once chaired a statewide residential loan authority in Missouri, warned against legislation proposed by Frank that would set aside some $10 billion to help cities and states buy up foreclosed properties and re-sell them or renovate them. Blunt said that in his experience, “local governments are notoriously poor managers of single-family housing.”

He sounded pessimistic about the potential impact of just about all the ideas proposed so far. “Some of these ideas are bad and some are really bad,” he said, adding that GOP House leaders are looking for an idea they can embrace. “Hopefully we’ll find one we can agree to,” Blunt added.

Putnam said he feared that election year pressures are forcing the Congress to act rashly. “Don’t turn this into the summer of an election-year over-reaction,” he said. Congress shouldn’t help “Miami condo flippers” while making it harder for responsible borrowers to get or keep a mortgage, he said.

Libby George and Edward Epstein contributed to this story.

First posted April 2, 2008 12:26 p.m.