Fannie Mae's plan to insure mortgages against homeowners' death and disability may have to be shelved, despite approval from the Department of Housing and Urban Development.

Both the Senate and House versions of the 1998 budget contain provisions that would tax all death benefits that Fannie earns-making the program much less profitable.

Fannie's supporters warned lawmakers the provisions could kill a program that is beneficial to homeowners. On Monday, Fannie Mae spokesman David Jeffers said, "We are exploring our options."

Under the program, Fannie would pay the premiums on behalf of homeowners and would receive death benefits in return.

Sources say Fannie tried to stop the Senate from following the House's lead on the new tax through a grassroots letter-writing campaign by nonprofit housing groups to influential senators.

A draft of one such letter said, in part: "The Fannie Mae Mortgage Protection Plan would help first-time homebuyers overcome the hurdle of economic insecurity by providing them with insurance coverage that would help them make their mortgage payments in the event of job loss, disability or loss of life.

"Unfortunately, the tax bill passed by the House Ways and Means Committee would make... (the plan) unworkable. Rather than discouraging such initiatives, Congress should be encouraging more private sector corporations to serve the needs of lower- and middle-income families. The Mortgage Protection Plan would help homebuyers without an expensive new government program."

When the insurance giveaway plan was unveiled in the spring, the plan drew opposition from House Banking Committee Chairman Jim Leach, R-Iowa, who denounced it as an abuse of the privileges Fannie enjoys through its ties to the government, such as access to cheap debt.

When HUD approved the program last week, Rep. Leach wasn't mollified. In a press release Monday, he said HUD made a "narrowly based, legalistic decision."

For one thing, he said, "HUD staff could not locate any reliable evidence that 'fear of dying' is a barrier to homeownership."

The agency has one more remedy-getting the White House to intervene. But the Department of Treasury is said to support the new taxes, making it harder for the White House to oppose the provisions.

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