July 23 (Bloomberg) -- The U.S. Congress may vote today on a rescue plan for Fannie Mae and Freddie Mac after lawmakers reached a deal on legislation aimed at alleviating the worst housing recession in a quarter century.

Treasury Secretary Henry Paulson today said the bill will send a ``very strong message'' and is ``key to helping us turn the corner'' after a slide in confidence in the firms. The White House dropped a veto threat over a measure to buy up foreclosed properties, spurring Senate Majority Leader Harry Reid to predict both legislative houses may approve the legislation today.

Paulson will get power to make unlimited equity purchases in and lend to Fannie Mae and Freddie Mac to prevent a collapse in the firms that account for 70 percent of new U.S. mortgages. The bill also provides for a federal agency to insure up to $300 billion of refinanced mortgages for struggling homeowners. Stocks rallied.

``It's important to get this legislation in place, and Congress and Paulson have done well to put together a workmanlike bill,'' said Peter Wallison, a former Treasury general counsel who is now a fellow at the American Enterprise Institute in Washington.

Legislators forged the agreement nine days after Paulson asked for powers to inject capital into the two mortgage finance companies, arguing the step was vital to shore up confidence in U.S. financial markets.

Shares Gain

Fannie Mae gained $2.46, or 18 percent, to $15.87 at 11:16 a.m. in New York Stock Exchange composite trading. Freddie Mac added 96 cents, or 10 percent, to $10.66. The Standard & Poor's 500 Stock Index gained 0.7 percent to 1,285.72

White House spokeswoman Dana Perino today said President George W. Bush will sign the bill, removing the previous veto threat over a provision to include $3.9 billion in aid to communities hit by the housing recession.

It's ``really good news'' that Bush removed his rejection warning, Reid, a Nevada Democrat, said today. He said the bill is ``a very good piece of legislation,'' and ``I hope we can finish it today,'' sending it to the president for signing into law.

Lawmakers added the provisions to a bill that would create a stronger regulator for Fannie Mae and Freddie Mac and expand federal efforts to stem mortgage defaults.

Lawmakers Compromise

Representative Barney Frank, a Massachusetts Democrat who chairs the House Financial Services Committee, said after lawmakers reached agreement yesterday that ``nobody is for everything that's in it or got everything in it he wanted, but we negotiated a lot.''

Lawmakers, intent on limiting potential losses to taxpayers, tied the potential aid to Fannie Mae and Freddie Mac to the federal debt limit. Still, they also raised that ceiling to $10.6 trillion from the current $9.815 trillion.

Paulson, in an emergency move after Fannie Mae and Freddie Mac stock dropped to the lowest levels in more than 17 years, asked July 13 for power to make unlimited equity purchases in the firms. He also asked for ``unspecified'' increases in their lines of credit, from $2.25 billion each. Both proposed measures would last until the end of next year.

Democratic lawmakers challenged Bush with yesterday's deal by including $3.9 billion for communities to purchase foreclosed properties. The White House opposed the measure, saying it would aid lenders who now owned the vacated properties rather than struggling homeowners.

No Veto

Perino said while the White House thought it would have the votes to uphold a veto, time was running out for action before legislators begin their summer recess in August.

``We believe this is not the time for a prolonged veto fight,'' she said in a conference call with reporters.

Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac own or guarantee about half of the $12 trillion of U.S. home loans outstanding. The companies face mounting losses stemming from the collapse of the subprime market.

Fannie Mae dropped about 45 percent in the month through yesterday, and Freddie Mac tumbled about 60 percent, on concern they have insufficient capital to cover writedowns and losses.

``This is about not only our housing markets, but it's about our capital markets more broadly,'' Paulson said in an interview with Bloomberg Television yesterday. ``We must, in the short term, take steps to boost confidence'' in the firms.

Fed Role

In addition to a new regulator, the bill provides for the Federal Reserve to consult on Fannie Mae and Freddie Mac finances. Paulson said this week that the Fed has already begun participating in assessments of the companies.

The housing bill would create a program aimed to help an estimated 400,000 Americans with subprime home loans refinance into 30-year, fixed-rate mortgages backed by the government.

Fannie Mae and Freddie Mac would have a new, higher cap on the size of mortgages they may purchase. The new limit would be $625,000, or the median home price plus 15 percent, whichever is lower, Frank said.

States would be able to offer an additional $11 billion of mortgage-revenue bonds to refinance subprime loans.

Chances for the legislation's passage also got a boost yesterday when the Congressional Budget Office released a cost estimate for Paulson's plan that was lower than some had feared. While a range of outcomes was possible, the non-partisan group put a price tag of $25 billion on the proposals.

``It's pretty good news -- a lot of people thought it would be much higher,'' Senator Richard Shelby of Alabama, the Senate Banking Committee's top Republican, said yesterday.

To contact the reporter on this story: Brian Faler in Washington at bfaler@bloomberg.net

Last Updated: July 23, 2008 11:25 EDT