updated 6/22/2008 3:46:31 PM ET 2008-06-22T19:46:31

President Bush and Congress have settled their differences on terrorist surveillance and Iraq war money. Now attention turns to a potential housing rescue, probably the last major initiative with any chance of passing before lawmakers scatter to campaign for re-election.

Bush has threatened a veto. But lawmakers in both parties say the housing legislation is a political imperative, and negotiators see the makings of a summertime bargain.

For one, the measure contains elements that Bush long has demanded. They include modernizing the Depression-era Federal Housing Administration and creating a new regulator for the government-sponsored mortgage companies Fannie Mae and Freddie Mac.

Then there is the political reality for the president: Many Republicans are facing a darkening re-election outlook amid tough economic times and are reluctant to oppose a measure intended to address the crux of the financial crisis.

Sen. Richard C. Shelby of Alabama, the top Republican on the Senate Banking, Housing and Urban Committee, says he hopes Bush will reconsider his veto threat. Insiders said the tepid wording of the threat, combined with intense behind-the-scenes negotiating by Treasury Secretary Henry M. Paulson to reach a deal, suggest the White House may be doing just that.

"The American people expect us to provide effective and timely solutions the best we can," Shelby said.

Democratic Sen. Charles E. Schumer, head of his party's Senate campaign committee, said the veto threat was "weird and wild" in light of Bush's demands for specific proposals that are in the legislation.

But Schumer, D-N.Y., said Democrats would be more than happy to bash Republicans for the demise of the housing rescue.

"This president is further and further removed from the economic realities of this nation. To veto this bill at a time when housing is at the nub of our economic crisis, at a time when housing prices are declining, at a time when foreclosures are increasing, makes no sense whatsoever," Schumer said.

The bill would allow the FHA to insure $300 billion in new loans so homeowners who cannot afford their house payments could refinance into cheaper, fixed-rate mortgages.

An important test vote comes Tuesday, with a final Senate vote expected soon after. That probably will open a new phase of talks to work out differences with the House in hopes of sending the bill to Bush in July.

The housing crisis has ensnared many borrowers who had questionable credit histories and who obtained risky subprime loans. Such loans have reset to higher rates and home values have plummeted.

The housing plan is designed to respond to the crisis. Mortgage holders would have to agree to take a substantial loss on the original loans, bringing them more in line with the depressed value of the homes.

Some Republicans, including House Minority Leader John A. Boehner of Ohio, say that approach amounts to a bailout for reckless homeowners who borrowed more than they could afford and for banks that exploited foolish consumers with too-good-to-be-true loans.

"Don't have FHA set up to take the fall with the worst of the worst loans from lenders, some of whom may have been ones who really put us in the problem," said Sen. Kit Bond, R-Mo.

Bond's attempt to kill the housing bill this past week failed by an overwhelming bipartisan margin that demonstrated the Senate could enact the measure over Bush's veto.

When lawmakers are going home, "they're hearing about this problem, not just from their constituents, but also from their county officials, their mayors, business and community leaders, so it's not OK to just say, 'We'll let the market correct itself,'" said Josh Nasar of the Center for Responsible Lending. "They've got to run for re-election."

Bush does not have to face voters in November. But his bargaining with Democratic leaders over terrorist surveillance and war spending last week showed he is ready to deal on issues that both parties want to neutralize before the elections.

"There really is no general good will about doing things together. It's more a question of taking things off the table that make both sides uncomfortable," said John C. Fortier, an analyst at the conservative American Enterprise Institute.

The housing measure could be the last such item.

Rep. Barney Frank, chairman of the House Financial Services Committee, has offered to jettison $3.9 billion in grants for states and cities to buy and fix up foreclosed properties in the interests of a deal. The White House has said those grants would lead to a veto.

Other points of disagreement, such as limits on the size of loans that the FHA can back and that Fannie Mae and Freddie Mac can buy, probably will be the subject of intense negotiations.

"I think we're pretty close," said Frank, D-Mass.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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