When Congress returns later this month, it will face a deepening housing crisis and a particularly murky economic outlook — not the sort of circumstances that lead to cautious, well thought-out legislation. Indeed, if the partisan bickering of the last few months cannot be overcome, the result may be no legislation, well thought-out or otherwise. The fact that this is a presidential election year will only add spice to the mix.

The most likely target for quick action is mortgage reform legislation. The House, following the lead of Financial Services Committee Chairman Barney Frank (D-Mass.), has already approved a bill that would restrict what reformers see as the mortgage market’s worst abuses. This measure awaits Senate action.

However, the Senate is not likely to rubber stamp what the House has done. Senate Banking Committee Chairman Christopher Dodd (D-Conn.) is no longer on the presidential campaign trail and therefore can get back to work in the Senate. Dodd already has his own mortgage reform bill ready to go — and it’s tough on the industry.

Dodd’s strategy is to see Frank and raise him. Frank’s House-passed bill increases the number of loans subject to special high-cost mortgage rules; Dodd’s bill adds still more. Dodd also takes a tougher stand on issues like yield-spread premiums, prepayment penalties, and debt-to-income ratios. Dodd wants to impose suitability standards on the mortgage industry and expose secondary market investors to liability for loans that violate statutory standards.

The financial services industry, which doesn’t like Frank’s bill, will go nuts over Dodd’s. Resistance will be intense. Whether it will be successful depends in large part on whether the growing housing crisis has still more surprises in store.

Other items Congress will be weighing include:

• FHA reform: Both houses of Congress have approved legislation to modernize the FHA program, but in different forms. In this case, the House version is more expansive, adding higher loan limits, lower down payments, and risk-based premiums to the Senate’s plan to liberalize eligibility requirements for FHA loans.
• Bankruptcy matters: Pressure is growing for a law change to grant bankruptcy judges to rewrite mortgage contracts. Some members would also like to undo some of the bankruptcy reform measures that lenders won in 2005.
• Credit card reforms: Both houses will consider legislation to ban or severely restrict a number of practices that big card issuers engage in, such as risk-based resetting of interest rates, trailing interest on debt paid in full, cumulative late-payment fees, fees for using certain payment methods, fees for currency translation, etc.
• Industrial loan companies (ILCs): The House has approved a bill to largely prohibit commercial ownership of ILCs, and a parallel bill is pending in the Senate. However, there is no chance Congress will act prior to the expiration of the FDIC moratorium on ILC applications.

How all this will shake out in the midst of an especially volatile election is anybody’s guess. However, 2008 does promise to be an entertaining year.