Paulson: GSE reforms too important to pass up

WASHINGTON (Reuters) - Treasury Secretary Henry Paulson said on Wednesday he urged President George W. Bush to drop objections to a major housing rescue bill because backstops and oversight reforms for government-sponsored housing enterprises were too important to pass up.

"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.

The final language in the sweeping housing rescue bill, authorizes the Treasury to provide unspecified loans and equity investments to mortgage finance giants Fannie Mae and Freddie Mac if needed and creates a new, stronger regulator for the two institutions.

The White House earlier said Bush would sign the bill, dropping a veto threat over a provision that called for $4 billion in community grants to buy up and repair foreclosed homes.

"It was easy for me to recommend to the president that he sign this bill given the importance of the GSE reform," Paulson said, adding that that Bush "understands the importance of this topic."

Paulson added that he was disappointed in the grant spending provisions of the bill, which he considers "wasteful" and "extraneous."

Nonetheless, Paulson said he was pleased with the agreement that Senate and House leaders reached on providing government backstops to Fannie and Freddie to shore up confidence in them and for creating a new, stronger regulator that would help address the systemic risks they pose.

"It's a very strong message that we're sending to investors around the world and the U.S. that we understand the importance of these organizations to our capital markets and to our housing market, and it's also going to be key to us turning the corner here in the housing correction ultimately," Paulson said.

The Treasury secretary said the Fed would have consultative role under the bill in helping to set capital standards for the GSEs, but would not serve as their regulator.

(Reporting by David Lawder; Editing by Jonathan Oatis)