WASHINGTON (Reuters) - The Senate moved closer on Monday to passing election-year legislation meant to save hundreds of thousands of troubled homeowners from foreclosure.

The legislation would create a government-backed mortgage insurance program with the power to refinance as much as $300 billion worth of failing home loans.

"This will be the major achievement and accomplishment of this Congress when it comes to dealing with the underlying economic crisis which is, at its heart, the foreclosure crisis," said Sen. Christopher Dodd, chairman of the Senate Banking Committee and an author of the legislation.

The Senate agreed to limit debate on Monday sending the measure toward a final vote planned for Wednesday. If the bill is ratified, it needs to be reconciled with a similar measure passed by the U.S. House of Representatives.

Independent research by the nonpartisan Congressional Budget Office found the measure would do little to ease the housing crisis.

Restrictions, administrative costs and red-tape will see the program reach only about $68 billion worth of the $300 billion worth of mortgages that it is authorized to handle, according to the CBO.

That amounts to roughly 400,000 of the 11 million borrowers who have some of the riskiest home loans and will face foreclosure between 2009 and 2011, the CBO said.

Under the Senate plan, mortgage companies would have to erase a share of a home's value before the government would be willing to take the loan off their hands.

"This is a significant cost to mortgage servicers, who have already thrown a significant amount of resources at this problem," said Edward Reardon, an analyst with JPMorgan. "There are technology issues. They would need to change the balance of the loan. It might all sound easy, but it is actually difficult."

The Senate bill imagines that mortgage-finance companies Fannie Mae and Freddie Mac would cover the costs of the program. Both companies saw their shares plunge to their lowest levels in nearly 16 years on Monday.

Each has lost more than three-quarters of their stock market value since last August when a crisis initially believed contained to the subprime mortgage market erupted into a global credit crisis.

The White House has threatened to veto the measure, but has said it is open to working with lawmakers on a possible compromise.

(Reporting by Patrick Rucker; Editing by Dan Grebler, Leslie Gevirtz)

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