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Fannie, Freddie Rally As Housing Rescue Advances

Shares of Fannie Mae and Freddie Mac surged Wednesday after President Bush dropped opposition to a housing rescue bill, clearing the way for measures meant to shore up the worst U.S. home market since the Great Depression.

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A White House spokeswoman said Bush would sign the bill because it is needed promptly to address a housing and credit crisis, despite concerns about a provision that would provide grants to communities to buy and repair foreclosed homes.

"We do not believe we have time for a prolonged veto fight," spokeswoman Dana Perino said.

Removal of the presidential veto threat spurred investors to snap up shares and bonds of mortgage finance companies Fannie Mae and Freddie Mac , which would receive an emergency government lifeline under the bill.

Concerns over the health of the two government-sponsored but privately held companies, which own or have guaranteed almost half of the $12 trillion in U.S. mortgage debt outstanding, had dashed hopes for recovery in battered U.S. housing and credit markets.

Analysts had warned of a financial catastrophe if they were to collapse.

Lawmakers have moved with unusual speed since the Bush administration proposed establishing a temporary financial backstop for the two companies just 10 days ago.

The House was expected to approve the rescue package later Wednesday; it would then go the Senate for final passage.

Senate Majority Leader Harry Reid said he wanted to send the measure to the president on Wednesday, but cautioned Republican lawmakers could delay it.

Treasury Secretary Henry Paulson said Wednesday he recommended that Bush drop his objections because reforms for Fannie Mae and Freddie Mac, the nation's two biggest mortgage finance companies, were too important.

"What we're doing with the GSEs is orders of magnitude more important than any of the other parts of this housing legislation," Paulson told reporters at an impromptu news conference.

In a further sign market concerns about the companies are relaxing, risk premiums on debt issued by the two companies narrowed.

Priya Misra, an interest rate strategist at investment bank Lehman Brothers, said the legislation "makes it easier for them to raise capital." Fannie Mae on Wednesday sold $3 billion in short term debt at higher interest rates than a week earlier.

The rates, however, rose less than a benchmark investors use to judge value, showing decent demand for the deal.

Lawmakers late Tuesday put finishing touches on the legislation and congressional budget analysts put a $25 billion potential price tag on the provision to bolster Fannie Mae and Freddie Mac, which was drafted by the Bush administration and added to a bill that has been in the works for months.

The overall measure now has wide, bipartisan support in both the House and the Senate, Massachusetts Democratic Rep. Barney Frank, the chief architect of the bill, said Tuesday.

The added measures would give beleaguered Fannie Mae and Freddie Mac access to an expanded credit line from the U.S. Treasury.

In addition, it authorizes the Treasury to purchase equity in the two companies if necessary.

More broadly, the measure would set up a new regulator for the companies and raise the size of mortgage loans that they and the Federal Housing Administration can guarantee.

It would permit the FHA to refinance up to $300 billion in mortgages facing foreclosure.

The new regulator for Fannie Mae and Freddie Mac, the result of years of debate over reining in the powerful government-sponsored enterprises, could have substantial authority over executive pay at the two companies if they were to tap into the new Treasury capital line.

In addition, the measure would empower the Treasury secretary to restrict dividend payments if they were to reach for the lifeline.

It would also give the Federal Reserve a "consultative role" in setting capital requirements and ensuring the financial soundness of the mortgage enterprises.

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.