July 28 (Bloomberg) -- Bank of America Corp., JPMorgan Chase and Co., Treasury Secretary Henry Paulson and Pacific Investment Management Co.'s Bill Gross are winners in the housing-bailout bill Congress passed last week.

Losers in the bill include shareholders of Fannie Mae and Freddie Mac, who may see their equity wiped out if the U.S. Treasury uses its new authority to take over the government- sponsored companies. Fannie and Freddie shares have fallen more than 70 percent in New York Stock Exchange composite trading this year.

``This legislation has indicated to investors that Fannie and Freddie are not implicitly guaranteed, not explicitly guaranteed, but we're close to that point,'' said Gross, 64, who oversees the $128 billion Total Return Fund for Newport Beach, California-based Pimco. ``We like it.''

The bill extends a government lifeline to Fannie and Freddie, shoring up public confidence in the two biggest providers of funding for U.S. mortgages and their $5.2 trillion of debt. It creates an independent agency to regulate the companies, launches a Federal Housing Administration program to insure as much as $300 billion in mortgages and provides tax credits to first-time buyers in a bid to reduce a backlog of unsold homes.

There was a 10-month supply of new homes for sale in June, according to a UBS AG research note July 25, slightly below the record of 11.2 months in March. Inventories stood at 6.5 months at the end of 2006, UBS said.

Speedy Passage

Congress accelerated action on the bill after lawmakers added a plan sought by Paulson, 62, allowing him to back up Fannie and Freddie. The Treasury may now buy shares of the companies, which own or back half of the $12 trillion in U.S. mortgages. The change prompted President George W. Bush, 62, to drop his veto threat. Bush is expected to sign the bill by the middle of the week, a White House spokesman said today.

Paulson's need to forge a deal on the legislation outweighed Republicans' aim to restrict the companies' influence in the mortgage market and reversed the Bush administration's position that the government doesn't guarantee their assets.

The Treasury chief's efforts contradicted predecessor John Snow's statement that investments in the two mortgage companies are ``uninsured'' and they aren't too big to fail. Republicans criticized the reversal, saying Paulson was turning his back on the party's free-market adherence.

Taxpayers On Hook

The bill did not go far enough to overhaul the lenders and would leave taxpayers on the hook for ``billions and billions of dollars,'' House Republican Leader John Boehner, 58, said.

``I am disappointed that we couldn't do better,'' Boehner, an Ohio Republican, said on the House floor last week.

Once Bush signs the bill into law, the Treasury will have the right to buy unlimited stock in Fannie Mae and Freddie Mac, which are known as government-sponsored enterprises. The measures provide a federal backstop for the two companies, letting them borrow at a cheaper rate than private corporations.

Unlike past corporate rescues, Congress is not requiring the companies to pay anything up front for the backing, said Joshua Rosner, an analyst with independent research firm Graham Fisher & Co. in New York.

``Once again, Fannie and Freddie rolled Congress,'' Rosner, 41, said. ``This is maybe the most taxpayer-unfriendly legislation we've seen in the past decade.''

``The legislation should reinforce confidence that the GSEs will be able to serve the housing-finance system now and in the future,'' Fannie Mae Chief Executive Officer Daniel Mudd said after the House passed the measure. Freddie Mac didn't comment on the legislative action.

`Sound, Comprehensive'

The legislation is ``sound and comprehensive'' and will help restore confidence ``in the housing markets by creating a new, stronger regulator markets by creating a new, stronger regulator with all the necessary tools to oversee Fannie Mae, Freddie Mac and the Federal Home Loan Banks,'' Office of Federal Housing Enterprise Oversight Director James Lockhart said.

Fannie Mae shares fell $1.24, or 11 percent, to $10.31 and Freddie Mac dropped 55 cents, or 6.7 percent, to $7.72 in New York Stock Exchange composite trading today.

The housing bill doesn't automatically give the Treasury preferential treatment over other shareholders if it buys the companies' preferred shares. The government also can't compel Fannie Mae or Freddie Mac to issue securities or purchase common stock.

`What They Wanted'

``It sounds like the GSEs got what they wanted again,'' said Paul Miller, an analyst with Friedman Billings Ramsey & Co. in Arlington, Virginia, who rates Fannie and Freddie ``underperform.''

Lawmakers rejected a proposal to bar Fannie Mae and Freddie Mac from paying dividends while they are tapping the Treasury's expanded line of credit. The legislation directs the agency to negotiate financing terms that ``take into consideration'' whether cutting those payments will protect taxpayers against losses.

Freddie Mac paid $1.55 billion in common and preferred dividends last year, according to the 2007 annual report. Its 12.09 percent yield is more than four times that for the Standard & Poor's 500 index. Fannie Mae's payouts totaled $2.48 billion. The shares yield 8.7 percent.

``They could say that paying dividends protects taxpayers because it maintains investor confidence,'' Rosner said. ``All of the criteria used in the bill are subjective and discretionary, which means they will ultimately be driven by the political will of the Congress and administration.''

Shareholders

The legislation offers little for shareholders, since debt owners will take precedence in the event the Treasury needs to begin buying the shares, said Moshe Orenbuch, an analyst at Credit Suisse, who rates both companies ``underperform.''

``I don't think the plan is positive for shareholders,'' he said. ``For senior-debt holders, certainly. I think that if the taxpayer does have to provide support to the GSEs, it's going to be extremely costly to the shareholders.''

The centerpiece of the legislation is a three-year FHA program that lets banks shift mortgages unlikely to be repaid to the government, after they agree to cut the amount of principal. The Congressional Budget Office estimated in May the program will cost $1.7 billion and cover about 500,000 loans over five years.

``We would expect to see an increase in the number of homebuyers who are seeking FHA financing to purchase a home,'' said Dan Frahm, a spokesman for Bank of America, which became the biggest mortgage lender after buying Countrywide Financial Corp. this month. The company is the leading provider of FHA loans, he said.

Deteriorating Loans

JPMorgan Chase, which services about $775 billion in mortgages, probably will tap the program since it will let investors shed deteriorating loans, spokesman Tom Kelly said.

The bank's mortgage-lending business will benefit from the $7,500 tax credit for first-time homebuyers included in the bill by enticing more people to buy homes, Kelly said.

``This bill with the FHA guarantee around it is going to encourage banks to use the program more,'' Francis Creighton, vice president of legislative affairs at the Mortgage Bankers Association, a Washington-based industry group, said in a telephone interview.

The measure also raises Fannie Mae and Freddie Mac's loan limit to $625,500 from $417,000 in high-cost areas.

Some banks may avoid the program, since reducing the interest rates or arranging repayment plans is less costly than cutting the loan balance.

`Reluctance'

``There may be some reluctance on the part of servicers to write down loans,'' said Celia Chen, director of housing economics at Moody's Economy.com. The law ``will make a small dent in foreclosures.''

House Financial Services Committee Chairman Barney Frank, who wrote the legislation, said he had spoken to executives at Bank of America and Credit Suisse Group AG about the program.

``They ought to be thinking now how they are going to take advantage of this,'' Frank, a 68-year-old Massachusetts Democrat, said at a July 23 news conference in Washington. ``I would be very disappointed if, having helped us formulate this, they don't take advantage of it.

To contact the reporters on this story: John Brinsley in Washington at jbrinsley@bloomberg.net; Alison Vekshin in Washington at avekshin@bloomberg.net.

Last Updated: July 28, 2008 16:07 EDT