A key House committee has shot down a White House plan that would, in effect, allow the Federal Housing Administration to insure mortgages to so-called "subprime" borrowers who have credit issues and would not otherwise qualify for FHA financing.

The House Appropriations Committee cleared $37 billion in funding for the Department of Housing and Urban Development, but refused to give any money to the FHA for the new lending program, as had been requested by the President in his budget proposal for fiscal 2004.

Under the Administration's plan, the FHA would back loans to credit-impaired borrowers, who would be required to make larger-than-normal downpayments and would be charged above-market interest rates.

If a borrower made his monthly payments on time for 24 consecutive months, he would be rewarded with a lower mortgage insurance premium.

Many private lenders offer a similar loan product in which the mortgage rate is lowered once borrowers demonstrate their ability and willingness to pay on time over a two-year period. But the FHA, which is often considered the financing of last resort before borrowers are shunted down into the far more expensive subprime market, can't insure such loans.

House appropriators said they were worried about the costs of a program that even the FHA is projecting will have an extremely high 15 percent default rate. The panel also questioned the fairness of lowering the insurance fee for less credit-worthy borrowers while charging more credit-worthy people regular premiums, and expressed concerns that such a program would leave borrowers open to predatory lending practices.

Elsewhere on Capital Hill, meanwhile, backers of failed legislation that would allow borrowers to deduct their monthly mortgage insurance premiums are hoping to attach the popular, bi-partisan proposal to a follow-up tax bill should one materialize later this year.

"This proposal is still very much alive," said Suzanne Hutchinson, executive vice president of the Mortgage Insurance Companies of America in Washington. Mortgage insurance is required by lenders when borrowers are putting up less than 20 percent of their own money. Borrowers foot the bill for coverage, but the insurance covers lenders in the event of a loan default.

Making mortgage insurance premiums deductible was approved in May by the Senate as part of the tax cut legislation requested by President Bush. But the provision was not part of the House measure and did not make it into the $350 billion tax package ultimately signed by the President.

The plan, which would allow borrowers earning less than $100,000 a year to claim the writeoff, has the support of a diverse group of civil rights, union, housing and mortgage organizations.

According to MICA, as many as 12 million borrowers who pay for either private mortgage insurance or FHA insurance would see an annual tax savings of about $200 if the measure becomes law. Borrowers whose loans are guaranteed by the Veterans Administration would realize a one-time $700 tax savings. In addition, proponents say that as many as 300,000 more low and moderate-income, immigrant and minority families could qualify for financing every year if they could deduct their mortgage insurance premiums.

The lead legislators on the measure, MICA says, are Sens. Gordon Smith, R-Ore., and Blanche Lincoln, D-Ark., in the upper chamber and Reps. Paul Ryan, R-Wisc., and William Jefferson, D-La., in the House.