By Kevin Drawbaugh and Tabassum Zakaria
WASHINGTON (Reuters) - U.S. President George W. Bushdropped a threat to veto a housing rescue bill under debate byCongress on Wednesday, clearing the way for measures meant toshore up the worst U.S. home slump since the Great Depression.
Removal of the presidential veto threat spurred investorsto snap up shares and bonds of mortgage finance companiesFannie Mae and Freddie Mac, which would receive an emergencygovernment lifeline under the bill.
The U.S. House of Representatives was expected to vote onthe measure later on Wednesday. It would then move to theSenate, where a vote may take place later this week or earlynext week, before landing on Bush's desk.
A White House spokeswoman said Bush would sign the billbecause it is needed promptly to address a housing and creditcrisis, despite concerns about a provision that would providegrants to communities to buy and repair foreclosed homes.
"We do not believe we have time for a prolonged vetofight," spokeswoman Dana Perino said.
Concerns over the health of the two government-sponsoredbut privately held companies, which own or have guaranteedalmost half of the $12 trillion (6 trillion pounds) in U.S.mortgage debt outstanding, had dashed hopes for recovery inbattered U.S. housing and credit markets. Analysts had warnedof a financial catastrophe if they were to collapse.
Lawmakers have moved with unusual speed since the Bushadministration proposed establishing a temporary financialbackstop for the two companies just 10 days ago.
Senate Majority Leader Harry Reid said he wanted to sendthe measure to the president on Wednesday, but cautionedRepublican lawmakers could delay it, and it was unclear whetherSenate approval would come this week.
Sen. Jim DeMint, a South Carolina Republican, sent a letterto Reid saying that he planned to introduce an amendment thatwould block Fannie Mae and Freddie Mac from using taxpayerdollars for lobbying.
TOO IMPORTANT
Treasury Secretary Henry Paulson said on Wednesday herecommended that Bush drop his objections because reforms forFannie Mae and Freddie Mac, the nation's two biggest mortgagefinance companies, were too important.
"What we're doing with the GSEs is orders of magnitude moreimportant than any of the other parts of this housinglegislation," Paulson told reporters at an impromptu newsconference.
Shares of Fannie Mae and Freddie Mac surged after stockmarkets opened. Fannie Mae shares were up 10 percent at $14.77,while Freddie Mac was up about 12 percent at $10.85 inafternoon trading on the New York Stock Exchange.
In a further sign market concerns about the companies arerelaxing, risk premiums on debt issued by the two companiesnarrowed. Priya Misra, an interest rate strategist atinvestment bank Lehman Brothers, said the legislation "makes iteasier for them to raise capital."
Fannie Mae on Wednesday sold $3 billion in short term debtat higher interest rates than a week earlier. The rates,however, rose less than a benchmark investors use to judgevalue, showing decent demand for the deal.
STRONGER REGULATOR
Lawmakers late on Tuesday put finishing touches on thelegislation and congressional budget analysts put a $25 billionpotential price tag on the provision to bolster Fannie Mae andFreddie Mac, which was drafted by the Bush administration andadded to a bill that has been in the works for months.
Brian Bethune, chief U.S. financial economist with GlobalInsight in Lexington, Massachusetts, said the tab could beconsiderably higher if the housing market worsens.
"The right constellation of monetary and fiscal policiesshould promote a stabilization of the housing market and getthe economy rolling again. In this case the Treasury could beon the hook for much less than $25 billion," he said. "Anymajor missteps, however, would mushroom the cost to theTreasury, and the American taxpayer, to $100 billion."
The added measures would give beleaguered Fannie Mae andFreddie Mac access to an expanded credit line from the U.S.Treasury. In addition, it authorizes the Treasury to purchaseequity in the two companies if necessary.
More broadly, the measure would set up a new regulator forthe companies and raise the size of mortgage loans they and theFederal Housing Administration can guarantee. It would permitthe FHA to refinance up to $300 billion in mortgages facingforeclosure.
The new regulator for Fannie Mae and Freddie Mac, theresult of years of debate over reining in the powerfulgovernment-sponsored enterprises, would have broadenedauthority to set capital requirements.
The legislation would also give the Federal Reserve a"consultative role" in setting those requirements and ensuringthe financial soundness of the mortgage enterprises.
(Additional reporting by David Lawder, Richard Cowan andKevin Drawbaugh, writing by Emily Kaiser and Mark Felsenthal;Editing by Neil Stempleman)
