WASHINGTON - A key Republican lawmaker is proposing to drastically curtail the government's role in insuring home loans to first-time and low- income homebuyers.

In an interview with the American Banker, Rep. Rick Lazio, R-N.Y., chairman of the housing subcommittee of the House Banking Committee, outlined his proposal to revamp the FHA program.

Under Mr. Lazio's plan, the government would go from insuring 100% of each mortgage to only a portion - maybe up to half - of the loan amount.

Insurance would vary by loan amount with larger loans carrying proportionately less insurance.

If loans default, the FHA would cover the first losses, and lenders would likely be liable for the rest - much like loans insured by the Department of Housing and Urban Development's VA program.

That would be a radical departure from the current setup, under which the government takes the entire loss on foreclosed loans.

The aim, Mr. Lazio said, is to make sure lenders share some of the risk of making government-insured loans.

Right now, "we guarantee 100 cents on the dollar," Mr. Lazio said. While most lenders are responsible, some make loans that should never have been made in the first place, he said. "There's really no accountability in the end, because the taxpayers are on the hook completely."

Mr. Lazio will introduce his bill later this month.

Mortgage bankers, who make the bulk of FHA's loans, were swift to denounce the Lazio proposal.

"We're convinced that risk sharing simply won't work for FHA," said Warren Lasko, executive vice president of the Mortgage Bankers Association. "Mortgage bankers, by and large, are not set up to take major risks against their capital. They do not have deep pockets."

If Mr. Lazio's proposal comes to pass, volumes in the FHA program would plunge, and the cost to borrowers would rise, Mr. Lasko said. Those most likely to suffer would be moderate-income, minority, and inner-city borrowers, he added.

Lenders already sustain losses when FHA loans go delinquent or are foreclosed, said Paul Reid, president of American Home Funding Inc., Richmond.

"Why are we trying to mess around with this thing?" Mr. Reid said. "Leave it alone."

Mortgage insurers, who have spearheaded a drive to restrict the FHA, welcomed Mr. Lazio's proposal.

"It's very good because it brings FHA in line with the way the private sector operates," said Suzanne Hutchinson, executive vice president of the Mortgage Insurance Companies of America.

Now "every party to the transaction has a loss when a foreclosure occurs," she said. That will encourage all parties to make sure each borrower can afford the house over the long term, she added.

The Depression-era FHA program has been the subject of heated debate for many months. Last winter, the Clinton administration's own Office of Management and Budget shocked FHA supporters by proposing the agency cut back its role to partially insuring pools of mortgages, rather than 100% of each loan.

But the move was opposed by Henry Cisneros, secretary of HUD. Mr. Cisneros' department oversees the FHA program. The administration now backs a proposal to move the FHA into an independent corporation and maintain its historic 100% insurance function.

As chairman of the Housing subcommittee, the 37-year-old Mr. Lazio is a crucial player in the FHA debate. His plan, though anathema to FHA backers, takes the middle road.

A more radical bill, introduced by Rep. Sam Brownback, R-Kan., and Rep. Sue Myrick, R-N.C., would further restrict FHA insurance. Another bill, introduced by Rep. Jerry Weller, R-Ill., would maintain the 100% insurance feature, and is backed by several freshman Republicans on the House Banking Committee.

Mr. Lazio's bill would change the status quo in two other ways.

The FHA would be largely restricted to first-time homebuyers. The agency would be required to meet lending targets similar to those for Fannie Mae and Freddie Mac. Currently, about two-thirds of FHA loans are made to first-time homebuyers.

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