–WASHINGTON (AP) - First-time homebuyers and people with poor credit would have greater access to federally insured mortgages under bipartisan legislation lawmakers are likely to take up this fall.

Proponents in Congress say allowing the Federal Housing Administration to insure more mortgages would help the riskiest borrowers buy homes, or refinance unaffordable loans, at a time when funds are drying up amid a worsening credit crunch.

When lawmakers reconvene after Labour Day they are expected to consider other ways to tackle the country's mortgage mess, such as banning abusive lending practices. But allowing FHA to back more loans could be a more direct way to shore up the housing market.

Still, as mortgage defaults soar, sceptics in Congress question whether the government should take on the additional financial risk.

FHA, which has provided mortgage insurance since 1934, has for the past two years been pushing Congress for the ability serve more customers.

"The need for the legislation was always critical, but it has been heightened by what's (been) going on in the market over the last several weeks," said Brian Chappelle, a Washington-based mortgage industry consultant.

Government officials and real estate industry trade groups say existing law hampers the FHA. For example, the size of mortgages the government agency can back is often too small to attract borrowers in expensive areas such as California and the Northeast. As a result, FHA's share of the single-family mortgage market has dropped to about four percent, down from 19 percent more than 10 years ago.

While FHA loans are insured by the government in the event of default, the mortgages themselves are made by major lenders such as Bank of America Corp. and Wells Fargo & Co., and are typically offered to investors as mortgage-backed securities by federal housing finance agency Ginnie Mae. The FHA currently insures 3.7 million loans.

Brian Montgomery, the Housing Department's assistant secretary in charge of the FHA, said the overhaul is especially necessary given the housing market's current problems.

"Every day that we don't get some sort of reform is a day that we can't help families that are trying to get out from a high-cost exotic subprime loan," Montgomery said. Subprime loans, which typically carry higher rates, are given to borrowers with weak credit records.

The FHA wants to raise the maximum mortgage amount it can insure in high areas to the same level as loans backed by the government-sponsored mortgage companies, Fannie Mae and Freddie Mac - $417,000 this year. Right now, the FHA's limit is $362,790 in those areas.

A bill to do so passed a House committee in May and is expected to be taken up by the full House this fall. A similar bill overwhelmingly passed the House last year. Meanwhile, Democrats and Republicans on the Senate Banking Committee have been working out the details of their own bill, though a final deal has yet to be reached.

But Sen. Richard Shelby, R-Ala., said at a hearing last month that the government should be cautious about loosening the FHA's standards as defaults increase. "Were those same losses to occur in FHA programs, it is likely they would be borne by the taxpayer," he said in prepared remarks.

FHA officials argue that their loans are less likely to default because they are government-backed and can be issued at lower rates. Over the past year, foreclosures on FHA loans have held steady around two percent, while subprime foreclosures have jumped to around five percent, the agency says.

One point of contention is whether FHA-backed borrowers should be required to make a down payment on their homes. While FHA borrowers currently must come up with a three percent down payment, the lending industry has encouraged no-money-down loans in recent years, making FHA-backed loans less competitive.