The measure passed by an impressive 84-12 vote, but even supporters of it acknowledge it's tilted too much in favor of businesses like home builders and does little to help borrowers at risk of losing their homes.
The plan combines large tax breaks for homebuilders and a $7,000 tax credit for people who buy foreclosed properties, as well as $4 billion in grants for communities to buy and fix up abandoned homes.
Despite the vote, the bill will be significantly redrawn by critics in the House who say it's tilted toward businesses such as home builders instead of borrowers.
The White House opposes the plan but has not issued an explicit veto threat. It says parts of the legislation would make the problem worse by depressing some home values and the measure inappropriately uses taxpayer money to bail out lenders saddled with foreclosed houses.
The House is likely to reject key portions of the Senate measure, including $25 billion over three years in tax breaks for money-losing businesses such as home builders. A plan adopted Wednesday by a key House panel dropped that idea as well as the tax credit for purchasers of foreclosed homes.
Senate Majority Leader Harry Reid, D-Nev., acknowledged changes will be needed in upcoming talks with the House and the White House.
"This is just the beginning of the process," Reid said. "This bill will go to the House. With the House and the White House we can come up with a piece of legislation fairly quickly."
Before passing the measure, the Senate added $6 billion in unrelated tax breaks for renewable energy producers, despite Senate rules that say tax cuts need to be "paid for" with revenue increases elsewhere in the tax code.
The bill also offers $150 billion for pre-foreclosure counseling and stronger loan disclosure requirements.
The $25 billion tax break the plan offers to homebuilders and other businesses absorbing heavy losses and the energy tax package were both dropped from an economic rescue plan enacted in February. Critics of those proposals said they were overly expensive and would not stimulate the economy.
But deepening public worries about the housing crisis appear to have emboldened lawmakers to swell the $9 trillion deficit to pay for the measures.
The $7,000 tax credit for the purchase of foreclosed homes, opponents argue, would unfairly reward purchases that would have happened anyway while possibly devaluing other homes. It also could give banks an incentive to foreclose on homes by subsidizing purchases of such properties.
The measure calls for a long-awaited modernization of the Federal Housing Administration that would enable more homeowners to refinance into loans backed by the Depression-era agency.
It includes $10 billion in tax-free mortgage revenue bonds to help homeowners refinance subprime loans, a move endorsed by President Bush.
A House bill takes a far different tack, steering tax breaks toward first-time home-buyers and investors in low-income rental housing. The measure is likely to be paired with a broader housing rescue package being drafted by Rep. Barney Frank, D-Mass., the Financial Services Committee chairman, that would have the FHA step in to back $300 billion in refinanced loans for 1 million or more homeowners who otherwise might face foreclosure.
Under a similar plan by Sen. Chris Dodd, D-Conn., the Banking Committee chairman, the FHA would insure up to $400 billion in loans.
The Bush administration countered those plans Wednesday with its own, far narrower, proposal. It would expand an existing FHA program to allow more homeowners who are facing large rate hikes to refinance into more affordable government-insured loans.