July 23 (Bloomberg) -- Fannie Mae and Freddie Mac extended their weeklong recovery after U.S. lawmakers reached a deal on legislation that authorizes Treasury Secretary Henry Paulson to bail out the mortgage-finance providers while placing few restrictions on the companies.

Fannie Mae rose 12 percent and Freddie Mac added 11 percent in New York Stock Exchange composite trading. Their market values have more than doubled since July 15 after plummeting on concern the companies may not have enough capital to withstand the highest mortgage delinquency rates in at least three decades.

Shareholders and the companies benefit because the bill doesn't require Fannie Mae or Freddie Mac to cut or eliminate dividends if they take federal aid, giving that discretion to the Treasury. It also doesn't automatically give the Treasury preferential treatment over other shareholders if it buys the companies' preferred shares. The government also can't compel the government-sponsored enterprises to issue securities or buy common stock.

``It sounds like the GSEs got what they wanted again,'' said Paul Miller, an analyst with Friedman Billings Ramsey & Co. in Arlington, Virginia. ``They got a big backstop and they got language that the Treasury doesn't necessarily have to stop them from paying dividends or cap compensation. That's why the stocks are ripping.''

The House of Representatives today approved the rescue plan for Fannie Mae and Freddie Mac as part of a bill aimed at alleviating the worst housing slump since the Great Depression. The bill passed 272-152. Legislators crafted the agreement nine days after Paulson asked for powers to buy unlimited amounts of stock and extend an unlimited credit line into Fannie Mae and Freddie Mac to enable them to continue buying mortgages.

Good News

The Senate will likely vote on the measure July 25 or 26, Senator Jim Bunning, a Republican from Kentucky, said.

Fannie Mae rose $1.59 to $15. Freddie Mac climbed $1.10 to $10.80. The companies began a plunge July 7 after Lehman Brothers Holdings Inc. said the companies may need to raise a combined $75 billion of capital to meet new accounting guidelines.

Washington-based Fannie Mae is down about 62 percent this year, while McLean, Virginia-based Freddie Mac has fallen about 68 percent. Both traded above $60 a share last year.

``It is good news if you own Fannie and Freddie stocks,'' said Brian Battle, Vice President of Trading at the Chicago-based brokerage Performance Trust Capital Partners. ``Fannie and Freddie will exist as they are now and will get bigger because Congress wants them to do something about the housing market, so that's good for Fannie and Freddie.''

No Dividend Requirement

Lawmakers rejected a proposal to bar Fannie Mae and Freddie Mac from paying dividends while they are tapping the expanded line of credit with Treasury, Representative Barney Frank, a Massachusetts Democrat who chairs the House Financial Services Committee, said late yesterday. They decided instead to give Paulson the power to restrict such payments or to take preferred stock in the companies, he said.

``It's not a mandate,'' Frank said. ``He's got to have some flexibility.''

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

The new regulator has reduced authority to approve new lines of business or products, said Joshua Rosner, an analyst with independent research firm Graham Fisher & Co. in New York.

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.

Higher Cap

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.

The Bush administration withdrew its veto threat on a measure to provide $3.9 billion to communities for the purchase of foreclosed properties.

The agreement increases the likelihood Paulson will get the authority this week, after he lobbied lawmakers to overcome concerns about taxpayer liability. The Treasury chief argued that the backstop for the beleaguered mortgage companies was critical to help safeguard U.S. financial market stability.

The government is leaning on Fannie Mae and Freddie Mac, which own or guarantee almost half of the $12 trillion in U.S. home loans outstanding, to help revive the housing market and stem a slowdown in the economy.

Credit-Default Swaps

The cost to protect the senior debt of Fannie Mae and Freddie Mac was little changed.

Credit-default swaps on Fannie Mae fell 0.5 basis point to 40 basis points today after dropping more than 40 basis points the past two weeks, according to London-based CMA Datavision. Contracts on Freddie Mac were unchanged at 40 basis points after falling from 80 basis points on July 9, CMA prices show.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They were conceived to protect bondholders against default and pay the buyer face value in exchange for the underlying securities or the cash equivalent should the company fail to adhere to its debt agreements.

Paulson yesterday said his rescue plan for Fannie Mae and Freddie Mac will help stabilize financial markets, and that he doesn't anticipate that he will need to bail out the companies.

``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 in New York. ``This goes well beyond the two institutions, Fannie and Freddie; it has to do with investors in the United States and investors all over the world.''

To contact the reporter on this story: Bryan Keogh in New York at bkeogh4@bloomberg.net; Dawn Kopecki in Washington at dkopecki@bloomberg.net.

Last Updated: July 23, 2008 17:37 EDT