WASHINGTON — As key House and Senate staff tried to work out a deal on legislation to help the mortgage market Friday, Sen. Richard Shelby, the Banking Committee's top Republican whose support is key to passage, gave the first signs that he is willing to compromise.

The Alabama Republican made it clear that no deal had been reached. But for the right trade-off, Sen. Shelby said could agree to an increase in the size of loans backed by the government sponsored enterprises.

"I have never been a big advocate of pushing the loan limit up because when you push the loan limit up you put more risk out there," Sen. Shelby said in an interview Friday. "But a lot of people have and if that's part of the deal and if we've got a strong regulator and they can approve products and deal with capital requirements, as we need over the GSES, with consulting roles for the Treasury and the Fed, that will be one heck of a big improvement."

Sen. Shelby's staff met with staff members for Senate Banking Committee Chairman Chris Dodd and House Financial Services Committee Chairman Barney Frank on Friday. It was the first time the three lawmakers' aides had all sat down to discuss this bill.

"We have a good chance to get a bill done right now…I believe it should pass," Sen. Shelby said in the interview.

In a statement late Friday, Sen. Dodd said, "The problems facing our financial markets and homeowners across the country are too serious for politics to stand in the way of comprehensive solutions."

Negotiations were expected to continue through the weekend and a vote in the House is expected Wednesday.

The price of Sen. Shelby's support is a sufficiently strong new GSE regulator and a ceiling to shield taxpayers from risks associated with giving the Treasury Department broad new power to rescue Fannie Mae and Freddie Mac.

The loan limit in the House bill is $729,750 while the Senate bill would cap it at $625,500 or the median house cost in an MSA, whichever is lower.

Another point of debate is the Treasury proposal to expand its line of credit to the GSEs beyond $2.25 billion each and to invest in the GSEs directly.

Rep. Frank has suggested requiring such investments to remain within the national debt limit, and on Friday Sen. Shelby implied that as well as other taxpayer protections were likely.

"We are going to have to put some kind of a limit on it on where it would be," said Sen. Shelby. One option is making the authority temporary, he said.

Treasury has asked for the power to lend or invest in the GSEs through 2009 but Sen. Charles Schumer, D-N.Y., has suggested limiting it to one year.

"Secondly, it would be tied perhaps, and we are still working on this, to the debt ceiling and there might be some other language. We haven't given up yet, but just to do something open-ended was something I questioned," Sen. Shelby said.

Congressional leaders are also likely to clarify that Treasury's authority — the credit line or the investments — would apply only in times of crisis, according to staff participating in the negotiations.

Sen. Shelby predicted investors would eventually return to the GSEs.

"I believe that once these markets are steadied — there's a lot of money out there," he said. "Investors are looking for good investments. They might go right back to Fannie and Freddie."

Sen. Shelby also said it was crucial that the Federal Reserve Board have a joint oversight role of the GSEs.

"The Fed has to be involved in anything this big."

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